<PAGE>   1
                                                                  EXHIBIT 10.126

                                                                  EXECUTION COPY


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                          SALE AND SERVICING AGREEMENT
                            Dated as of June 14, 1997

                                      among

                   MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3

                                    (Issuer)

                        FINANCIAL ASSET SECURITIES CORP.

                                   (Depositor)

                            MEGO MORTGAGE CORPORATION

                              (Seller and Servicer)

                          NORWEST BANK MINNESOTA, N.A.

                                (Master Servicer)

                                       and

                         FIRST BANK NATIONAL ASSOCIATION

                    (Indenture Trustee and Co-Owner Trustee)

                   MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3
                   HOME LOAN ASSET-BACKED NOTES, SERIES 1997-3

               HOME LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-3

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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----

                                          ARTICLE I.

                                          DEFINITIONS
<S>                      <C>                                                             <C>
        Section 1.01         Definitions...................................................  1
        Section 1.02         Other Definitional Provisions................................. 26
        Section 1.03         Interest Calculations......................................... 26

                                          ARTICLE II.

                                 CONVEYANCE OF THE HOME LOANS

        Section 2.01         Conveyance of the Home Loans.................................. 27
        Section 2.02         Reserved...................................................... 27
        Section 2.03         Ownership and Possession of Home Loan Files................... 27
        Section 2.04         Books and Records............................................. 28
        Section 2.05         Delivery of Home Loan Documents............................... 28
        Section 2.06         Acceptance by Indenture Trustee of the Home Loans; Certain
                             Substitutions; Initial Certification.......................... 31

                                         ARTICLE III.

                                REPRESENTATIONS AND WARRANTIES

        Section 3.01         Representations and Warranties of the Depositor................33
        Section 3.02         Representations, Warranties and Covenants of the Master
                             Servicer...................................................... 33
        Section 3.03         Representations and Warranties of Mego........................ 36
        Section 3.04         [Reserved].................................................... 44
        Section 3.05         Purchase and Substitution..................................... 44

                                          ARTICLE IV.

                          ADMINISTRATION AND SERVICING OF HOME LOANS

        Section 4.01         Servicing Standard............................................ 47
        Section 4.02         Servicing Arrangements........................................ 48
        Section 4.03         Servicing Record.............................................. 49
        Section 4.04         Annual Statement as to Compliance; Notice of Event of Default. 52
        Section 4.05         Annual Independent Accountants' Report; Servicer Review
                             Report........................................................ 52
        Section 4.06         Access to Certain Documentation and Information Regarding
                             Home Loans.................................................... 53
        Section 4.07         [Reserved].................................................... 54
        Section 4.08         Advances...................................................... 54
        Section 4.09         Reimbursement of Interest Advances and Foreclosure Advances... 55
        Section 4.10         Modifications, Waivers, Amendments and Consents............... 56
        Section 4.11         Due-On-Sale; Due-on-Encumbrance............................... 56
        Section 4.12         Collection Procedures; Foreclosure Procedures................. 57
        Section 4.13         Sale of Foreclosed Properties................................. 58
</TABLE>


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<TABLE>
<S>                      <C>                                                             <C>
        Section 4.14.        Management of Real Estate Owned............................... 59
        Section 4.15.        Inspections................................................... 60
        Section 4.16.        Maintenance of Insurance...................................... 60
        Section 4.17.        Release of Files.............................................. 61
        Section 4.18.        Filing of Continuation Statements............................. 62
        Section 4.19.        Fidelity Bond................................................. 63
        Section 4.20.        Errors and Omissions Insurance................................ 63



                                          ARTICLE V.

                                ESTABLISHMENT OF TRUST ACCOUNTS

        Section 5.01         Collection Account and Note Distribution Account.............. 64
        Section 5.02         [Reserved].................................................... 68
        Section 5.03         Certificate Distribution Account.............................. 68
        Section 5.04         Trust Accounts; Trust Account Property........................ 69
        Section 5.05         Servicer to Pay Owner Trustee Fee............................. 72

                                          ARTICLE VI.

                     STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS

        Section 6.01         Master Servicing Certificate.................................. 73
        Section 6.02         Statement to Securityholders.................................. 73



                                         ARTICLE VII.

                                          [Reserved]

                                         ARTICLE VIII.

                                          [Reserved]

                                          ARTICLE IX.

                                      THE MASTER SERVICER

        Section 9.01         Indemnification; Third Party Claims........................... 76
        Section 9.02         Merger or Consolidation of the Master Servicer................ 76
        Section 9.03         Limitation on Liability of the Master Servicer and Others..... 77
        Section 9.04         Master Servicer Not to Resign; Assignment..................... 77
        Section 9.05         Relationship of Master Servicer to Issuer and the Indenture
                             Trustee....................................................... 78
        Section 9.06         Master Servicer May Own Notes................................. 78
</TABLE>



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<TABLE>
                                          ARTICLE X.

                                            DEFAULT
<S>                      <C>                                                             <C>
        Section 10.01        Events of Default............................................. 79
        Section 10.02        Consequences of an Event of Default........................... 80
        Section 10.03        Appointment of Successor...................................... 81
        Section 10.04        Notification to Certificateholders............................ 81
        Section 10.05        Waiver of Past Defaults....................................... 82

                                          ARTICLE XI.

                                          TERMINATION

        Section 11.01        Termination................................................... 83
        Section 11.02        Notice of Termination......................................... 83

                                         ARTICLE XII.

                                   MISCELLANEOUS PROVISIONS

        Section 12.01        Acts of Securityholders....................................... 84
        Section 12.02        Amendment..................................................... 84
        Section 12.03        Recordation of Agreement...................................... 85
        Section 12.04        Duration of Agreement......................................... 85
        Section 12.05        Governing Law................................................. 85
        Section 12.06        Notices....................................................... 85
        Section 12.07        Severability of Provisions.....................................86
        Section 12.08        No Partnership.................................................86
        Section 12.09        Counterparts...................................................86
        Section 12.10        Successors and Assigns.........................................86
        Section 12.11        Headings.......................................................86
        Section 12.12        Actions of Securityholders.....................................87
        Section 12.13        Reports to Rating Agencies.....................................87
        Section 12.14        Inconsistencies Among Transaction Documents....................88

                                           EXHIBITS

EXHIBIT A                    Home Loan Schedule
EXHIBIT B                    Form of Master Servicer Certificate
EXHIBIT C                    Form of Monthly Statement to Securityholders
EXHIBIT D                    Underwriting Guidelines
EXHIBIT E                    Form of Servicing Agreement
</TABLE>


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<PAGE>   5



        This Sale and Servicing Agreement is entered into effective as of June
14, 1997, among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3, a Delaware business
trust (the "Issuer" or the "Trust"), FINANCIAL ASSET SECURITIES CORP., a
Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION,
a Delaware corporation ("Mego"), as Seller (in such capacity, the "Seller") and
Servicer (in such capacity, the "Servicer"), NORWEST BANK MINNESOTA, N.A., as
Master Servicer (the "Master Servicer"), and FIRST BANK NATIONAL ASSOCIATION, a
national banking association, as Indenture Trustee on behalf of the Noteholders
(in such capacity, the "Indenture Trustee") and as Co-Owner Trustee on behalf of
the Securityholders (in such capacity, the "Co-Owner Trustee").

                                     PRELIMINARY STATEMENT

        WHEREAS, the Issuer desires to purchase a pool of Home Loans which were
originated or purchased by the Seller and sold to the Depositor in the ordinary
course of business of the Seller;

        WHEREAS, the Depositor is willing to purchase from the Seller and sell
such Home Loans to the Issuer; and

        WHEREAS, the Master Servicer is willing to service such Home Loans in
accordance with the terms of this Agreement;

        NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto hereby agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

        Section 1.01 Definitions. Whenever used in this Agreement, the following
words and phrases, unless the context otherwise requires, shall have the
meanings specified in this Article.

        Accrual Period: With respect to the first Distribution Date and the
Class A-1 Notes, the period commencing on the Closing Date and ending on the day
immediately preceding such Distribution Date (28 days). With respect to any
subsequent Distribution Date and the Class A-1 Notes, the period commencing on
the immediately preceding Distribution Date and ending on the day immediately
preceding such subsequent Distribution Date. With respect to the first
Distribution Date and the Classes of Securities other than the Class A-1 Notes,
the period commencing on the Cut-Off Date and ending on the last day of the
month of the Cut-Off Date (17 days). With respect to any Classes of Securities
other than the Class A-1 Notes for a given Distribution Date, the calendar month
preceding the month of such Distribution Date based on a 360-day year consisting
of twelve 30-day months.


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        Aggregate Note Principal Balance: With respect to any Distribution Date,
the aggregate of the Class Principal Balances of the Notes.

        Agreement: This Sale and Servicing Agreement and all amendments hereof
and supplements hereto.

        Allocable Loss Amount: With respect to each Distribution Date, the
excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Securities (after giving effect to all distributions on such
Distribution Date) over (b) the Pool Principal Balance as of the end of the
preceding Due Period.

        Allocable Loss Amount Priority: With respect to any Distribution Date,
sequentially, to the Certificates, the Class M-2 Notes and the Class M-1 Notes,
in that order, until the respective Class Principal Balances thereof are reduced
to zero.

        Assignment of Mortgage: With respect to each Home Loan secured by a
Mortgage, an assignment, notice of transfer or equivalent instrument sufficient
under the laws of the jurisdiction wherein the related Property is located to
reflect of record the sale of the related Home Loan to the Trust as follows:
"First Bank National Association, as Indenture Trustee and Co-Owner Trustee for
the Mego Mortgage Home Loan Owner Trust 1997-3".

        Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a day
on which banking institutions in New York City or in the city in which the
Corporate Trust Office of the Indenture Trustee is located or the city in which
the Master Servicer's or Servicer's servicing operations are located and are
authorized or obligated by law or executive order to be closed.

        Certificate Distribution Account: The account established and maintained
pursuant to Section 5.03.

        Certificate: Any Certificate issued pursuant to the Trust Agreement.

        Certificateholder: A holder of any Certificate.

        Certificateholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Certificates, the sum of (i) the excess of (A) the
Certificateholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Certificateholders' Interest Carry-Forward
Amount on such preceding Distribution Date, over (B) the amount of interest that
is actually distributed to the Certificateholders on such preceding Distribution
Date plus (ii) interest on such excess, to the extent permitted by law, at the
applicable Certificate Pass-Through Rate from such proceeding Distribution Date
through the current Distribution Date.

        Certificateholders' Interest Distributable Amount: With respect to any
Distribution Date and the Certificates, the sum of the Certificateholders'
Monthly Interest Distributable Amount and the Certificateholders' Interest
Carry-Forward Amount for such Distribution Date; provided


                                        2


<PAGE>   7



however, that on the Distribution Date, if any, on which the Class Principal
Balance of the Certificates is reduced to zero through application of an
Allocable Loss Amount, the Certificateholders' Interest Distributable Amount
shall be reduced by an amount equal to the portion, if any, of the Allocable
Loss Amount that would be allocable to the Classes of Mezzanine Notes without
giving effect to this proviso.

        Certificateholders' Monthly Interest Distributable Amount: With respect
to any Distribution Date and the Certificates, interest accrued during the
related Accrual Period at the Certificate Pass-Through Rate on the Class
Principal Balance of the Certificates immediately preceding such Distribution
Date (or, in the case of the first Distribution Date, on the Closing Date).

        Certificate Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (i) the aggregate Class Principal Balance of the Notes
(after taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Notes prior to such
determination) and (ii) the Overcollateralization Target Amount for such
Distribution Date; provided however, that the Certificate Optimal Principal
Balance amount shall never be less than zero or greater than the Original Class
Principal Balance of the Certificates.

        Certificate Pass-Through Rate: The per annum rate of 8.01%; provided,
however, with respect to any Distribution Date after the first Distribution Date
on which either the Mego or the Master Servicer may exercise its option to
purchase the Home Loans pursuant to Section 11.01(b), the Certificate
Pass-Through Rate shall be 8.51%.

        Certificate Register: The register established pursuant to Section 3.4
of the Trust Agreement.

        Class: With respect to the Notes, all Notes bearing the same class
designation, and with respect to the Certificates, the Certificates shall be
deemed to be one class.

        Class A-1 Note: Any Class A-1 Note in the form attached to the Indenture
as Exhibit A-1.

        Class A-2 Note: Any Class A-2 Note in the form attached to the Indenture
as Exhibit A-2.

        Class A-3 Note: Any Class A-3 Note in the form attached to the Indenture
as Exhibit A-3.

        Class A-4 Note: Any Class A-4 Note in the form attached to the Indenture
as Exhibit A-4.


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<PAGE>   8



        Class M-1 Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (i) the aggregate Class Principal Balance of the Senior
Notes (after taking into account distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes prior
to such determination) and (ii) the greater of (x) the sum of (1) 25.50% of the
Pool Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (calculated
without giving effect to the proviso in the definition thereof) or (y) 0.50% of
the Original Pool Principal Balance; provided however, that the Class M-1
Optimal Principal Balance shall never be less than zero or greater than the
Original Class Principal Balance of the Class M-1 Notes.

        Class M-2 Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; with respect to any other Distribution
Date, the Pool Principal Balance as of the preceding Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes prior
to such determination) plus the Class Principal Balance of the Class M-1 Notes
(after taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balance of the Class M-1 Notes prior to such
determination) and (ii) the greater of (x) the sum of (1) 11.00% of the Pool
Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (without giving
effect to the proviso in the definition thereof) or (y) 0.50% of the Original
Pool Principal Balance; provided, however, that the Class M-2 Optimal Principal
Balance shall never be less than zero or greater than the Original Class
Principal Balance of the Class M-2 Notes.

        Class M-1 Note: Any Class M-1 Note in the form attached to the Indenture
as Exhibit A.

        Class M-2 Note: Any Class M-2 Note in the form attached to the Indenture
as Exhibit A.

        Class Principal Balance: With respect to each Class and as of any date
of determination, the Original Class Principal Balance of such Class reduced by
the sum of (i) all amounts previously distributed in respect of principal of
such Class on all previous Distribution Dates and (ii) with respect to the Class
M-1, Class M-2 Notes and the Certificates, all Allocable Loss Amounts applied in
reduction of principal of such Class on all previous Distribution Dates.

        Closing Date:  June 27, 1997.

        Code: The Internal Revenue Code of 1986, as amended from time to time,
and Treasury Regulations promulgated thereunder.


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        Collected Amount: With respect to any Determination Date or related
Distribution Date, the sum of the amount on deposit in the Note Distribution
Account on such Determination Date plus the amounts required to be deposited
into the Note Distribution Account pursuant to Section 5.01(b).

        Collection Account: The account denominated as a Collection Account and
maintained or caused to be maintained by the Indenture Trustee pursuant to
Section 5.01.

        Corporate Trust Office: The office of the Indenture Trustee at which any
particular time its corporate business shall be principally administered,
located on the Closing Date at First Bank National Association, 180 East 5th
Street, St. Paul, Minnesota 55101, Attention: Structured Finance.

        Co-Owner Trustee: First Bank National Association, a national banking
association, in its capacity as the Co-Owner Trustee under the Trust Agreement
acting on behalf of the Securityholders, or any successor co-owner trustee under
the Trust Agreement.

        Cumulative Net Losses: With respect to any Distribution Date, the
aggregate amount of Net Loan Losses calculated for such Distribution Date and
each prior Distribution Date, reduced by any recoveries in respect of principal
on a Defaulted Home Loan received after the Due Period in which such Home Loan
became a Defaulted Home Loan.

        Cut-Off Date: With respect to any Home Loan, the opening of business on
June 14, 1997.

        Debt Instrument: The note or other evidence of indebtedness evidencing
the indebtedness of an Obligor under a Home Loan.

        Defaulted Home Loan: A Home Loan with respect to which: (i) the Property
has been acquired through foreclosure or similar proceedings and sold, (ii) any
portion of a Monthly Payment is more than 180 calendar days past due (without
giving effect to any grace period), or (iii) the Servicer has determined in
accordance with customary servicing practices, that the Home Loan is
uncollectible.

        Defective Home Loan: A Home Loan required to be repurchased pursuant to
Section 3.05 hereof.

        Delivery: When used with respect to Trust Account Property means:

                (a)     with respect to bankers' acceptances, commercial paper,
        negotiable certificates of deposit and other obligations that constitute
        "instruments" within the meaning of Section 9-105(1)(i) of the UCC and
        are susceptible of physical delivery, transfer thereof to the Indenture
        Trustee or its nominee or custodian by physical delivery to the
        Indenture Trustee or its nominee or custodian endorsed to, or registered
        in the name of, the Indenture Trustee or its nominee or custodian or
        endorsed in blank, and, with


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        respect to a certificated security (as defined in Section 8-102 of the
        UCC) transfer thereof (i) by delivery of such certificated security
        endorsed to, or registered in the name of, the Indenture Trustee or its
        nominee or custodian or endorsed in blank to a financial intermediary
        (as defined in Section 8-313 of the UCC) and the making by such
        financial intermediary of entries on its books and records identifying
        such certificated securities as belonging to the Indenture Trustee or
        its nominee or custodian and the sending by such financial intermediary
        of a confirmation of the purchase of such certificated security by the
        Indenture Trustee or its nominee or custodian, or (ii) by delivery
        thereof to a "clearing corporation" (as defined in Section 8-102(3) of
        the UCC) and the making by such clearing corporation of appropriate
        entries on its books reducing the appropriate securities account of the
        transferor and increasing the appropriate securities account of a
        financial intermediary by the amount of such certificated security, the
        identification by the clearing corporation of the certificated
        securities for the sole and exclusive account of the financial
        intermediary, the maintenance of such certificated securities by such
        clearing corporation or a "custodian bank" (as defined in Section
        8-102(4) of the UCC) or the nominee of either subject to the clearing
        corporation's exclusive control, the sending of a confirmation by the
        financial intermediary of the purchase by the Indenture Trustee or its
        nominee or custodian of such securities and the making by such financial
        intermediary of entries on its books and records identifying such
        certificated securities as belonging to the Indenture Trustee or its
        nominee or custodian (all of the foregoing, "Physical Property"), and,
        in any event, any such Physical Property in registered form shall be in
        the name of the Indenture Trustee or its nominee or custodian; and such
        additional or alternative procedures as may hereafter become appropriate
        to effect the complete transfer of ownership of any such Trust Account
        Property (as defined herein) to the Indenture Trustee or its nominee or
        custodian, consistent with changes in applicable law or regulations or
        the interpretation thereof;

                (b)     with respect to any securities issued by the U.S.
        Treasury, FNMA or FHLMC that is a book-entry security held through the
        Federal Reserve System pursuant to federal book-entry regulations, the
        following procedures, all in accordance with applicable law, including
        applicable federal regulations and Articles 8 and 9 of the UCC:
        book-entry registration of such Trust Account Property to an appropriate
        book-entry account maintained with a Federal Reserve Bank by a financial
        intermediary that is also a "depository" pursuant to applicable federal
        regulations and issuance by such financial intermediary of a deposit
        advice or other written confirmation of such book-entry registration to
        the Indenture Trustee or its nominee or custodian of the purchase by the
        Indenture Trustee or its nominee or custodian of such book-entry
        securities; the making by such financial intermediary of entries in its
        books and records identifying such book-entry security held through the
        Federal Reserve System pursuant to federal book-entry regulations as
        belonging to the Indenture Trustee or its nominee or custodian and
        indicating that such custodian holds such Trust Account Property solely
        as agent for the Indenture Trustee or its nominee or custodian; and such
        additional or alternative procedures as may hereafter become appropriate
        to effect complete transfer of ownership


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        of any such Trust Account Property to the Indenture Trustee or its
        nominee or custodian, consistent with changes in applicable law or
        regulations or the interpretation thereof; and

                (c)     with respect to any item of Trust Account Property that
        is an uncertificated security under Article 8 of the UCC and that is not
        governed by clause (b) above, registration on the books and records of
        the issuer thereof in the name of the financial intermediary, the
        sending of a confirmation by the financial intermediary of the purchase
        by the Indenture Trustee or its nominee or custodian of such
        uncertificated security, the making by such financial intermediary of
        entries on its books and records identifying such uncertificated
        certificates as belonging to the Indenture Trustee or its nominee or
        custodian.

        Depositor: Financial Asset Securities Corp., a Delaware corporation, and
any successor thereto.

        Determination Date: With respect to any Distribution Date, the fifth
Business Day preceding such Distribution Date.

        Distribution Date: The 25th day of any month or if such 25th day is not
a Business Day, the first Business Day immediately following such day,
commencing in July 1997.

        DTC: The Depository Trust Company.

        Due Date: With respect to any Monthly Payment, the date on which such
Monthly Payment is required to be paid pursuant to the related Debt Instrument.

        Due Period: With respect to any Determination Date or Distribution Date,
the calendar month immediately preceding such Determination Date or Distribution
Date, as the case may be; provided, however, that with respect to the July 1997
Distribution Date, Due Period shall mean the period from June 14, 1997 to June
30, 1997.

        DCR: Duff & Phelps Credit Rating Co.

        Early Termination Notice Date: Any date on which the Pool Principal
Balance is less than 10% of the Initial Principal Balance.

        Eligible Account: At any time, an account which is any of the following:
(i) A segregated trust account that is maintained with the corporate trust
department of a depository institution (A) the long-term debt obligations of
which are at such time rated by each Rating Agency in one of their two highest
long-term rating categories, or (B) short-term debt obligations of which are
then rated by each Rating Agency in their highest short-term rating category or
(C) a segregated trust account department of a federal or state chartered
depository institution or trust company having capital and surplus of not less
than $100,000,000 acting in its fiduciary capacity; (ii) a segregated direct
deposit account maintained with a depository institution or trust company


                                        7


<PAGE>   12



organized under the laws of the United States of America, or any of the States
thereof, or the District of Columbia, having a certificate of deposit, short
term deposit or commercial paper rating of at least A-1+ by Standard & Poor's
and P-1 by Moody's or (iii) an account that will not cause any Rating Agency to
downgrade or withdraw its then current rating(s) assigned to the Notes as
evidenced in writing by such Rating Agency.

        Eligible Servicer: Either a Person that (a) (i) is servicing a portfolio
of mortgage loans, (ii) is legally qualified to service, and is capable of
servicing, the Home Loans and has all licenses required to service mortgage
loans, (iii) has demonstrated the ability professionally and competently to
service a portfolio of mortgage loans similar to the Home Loans with reasonable
skill and care, (iv) has a net worth calculated in accordance with generally
accepted accounting principles of at least $500,000 and (v) has been approved in
writing by the Rating Agencies or (b) Mego Mortgage Corporation, Preferred
Equities Corporation or Norwest Bank Minnesota, N.A.

        Event of Default:  As described in Section 10.01 hereof.

        Excess Spread. With respect to any Distribution Date, the positive
excess, if any, of (x) the Collected Amount with respect to such Distribution
Date over (y) the amount distributed pursuant to clauses (i) and (ii) of Section
5.01(c) on such Distribution Date.

        FDIC: The Federal Deposit Insurance Corporation and any successor
thereto.

        FHLMC: The Federal Home Loan Mortgage Corporation and any successor
thereto.

        FICO Score: The credit evaluation scoring methodology developed by Fair,
Isaac and Company.

        Final Maturity Date: With respect to the following Classes of
Securities:

               Class A-1 Notes: August 25, 2023
               Class A-2 Notes: August 25, 2023
               Class A-3 Notes: August 25, 2023
               Class A-4 Notes: August 25, 2023
               Class M-1 Notes: August 25, 2023
               Class M-2 Notes: August 25, 2023
               Certificates:    August 25, 2023

        Fitch: Fitch Investors Service, L.P.

        FNMA: The Federal National Mortgage Association and any successor
thereto.

        Foreclosure Advances: As defined in Section 4.08(b).


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<PAGE>   13



        Foreclosed Loan. As of any date of determination, any Mortgage Loan that
has been discharged as a result of (i) the completion of foreclosure or
comparable proceedings; (ii) the Owner Trustee's acceptance of the deed or other
evidence of title to the related Property in lieu of foreclosure or other
comparable proceeding; or (iii) the acquisition by the Owner Trustee of title to
the related Property by operation of law.

        Foreclosed Property. With respect to any Mortgage Loan, any Property
acquired by the Trust as a result of:

                        (i)     the completion of foreclosure or comparable
        proceedings with respect to the related Mortgage Loan;

                        (ii)    the Co-Owner Trustee's acceptance of the deed or
        other evidence of title to the related Property in lieu of foreclosure
        or other proceeding with respect to the related Loan; or

                        (iii)   the acquisition by the Co-Owner Trustee of title
        thereto by operation of law.

        Grant:  As defined in the Indenture.

        HUD: The United States Department of Housing and Urban Development and
any successor thereto.

        Home Loan: An individual home loan that is conveyed to the Issuer
pursuant to this Agreement on the Closing Date, together with the rights and
obligations of a holder thereof and payments of principal in respect of such
Home Loan received on or after the Cut-Off Date and payments of interest in
respect of such Home Loan due on or after the Cut-Off Date, the Home Loans
subject to this Agreement being identified on the Home Loan Schedule as amended
from time to time and annexed hereto as Exhibit A.

        Home Loan File: The Indenture Trustee's Home Loan File and the
Servicer's Home Loan File.

        Home Loan Interest Rate: The fixed annual rate of interest borne by a
Debt Instrument, as shown on the related Home Loan Schedule.

        Home Loan Pool:  The pool of Home Loans.

        Home Loan Purchase Agreement: The home loan purchase agreement between
the Seller, as seller, and the Depositor, as purchaser, dated as of June 14,
1997.


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<PAGE>   14



        Home Loan Schedule: The schedule of Home Loans specifying with respect
to each Home Loan, the information set forth on Exhibit A attached hereto, as
amended or supplemented from time to time.

        Indenture: The Indenture, dated as of June 14, 1997, between the Issuer
and the Indenture Trustee.

        Indenture Trustee: First Bank National Association, a national banking
association, as Indenture Trustee under the Indenture and this Agreement acting
on behalf of the Noteholders, or any successor indenture trustee under the
Indenture and this Agreement.

        Indenture Trustee Fee: With respect to any Distribution Date, the
greater of (A) one-twelfth of 0.0275% times the Pool Principal Balance of the
Home Loans as of the opening of business on the first day of the calendar month
preceding the calendar month of such Distribution Date (or, with respect to the
first Distribution Date, the Original Pool Principal Balance); and (B) $666.67.

        Indenture Trustee's Home Loan File:  As defined in Section 2.05.

        Independent: When used with respect to any specified Person, such Person
(i) is in fact independent of Mego, the Master Servicer, the Depositor or any of
their respective affiliates, (ii) does not have any direct financial interest in
or any material indirect financial interest in any of Mego, the Master Servicer,
the Depositor or any of their respective affiliates and (iii) is not connected
with any of Mego, the Master Servicer, the Depositor or any of their respective
affiliates, as an officer, employee, promoter, underwriter, trustee, partner,
director or Person performing similar functions; provided, however, that a
Person shall not fail to be Independent of Mego, the Master Servicer, the
Depositor or any of their respective affiliates merely because such Person is
the beneficial owner of 1% or less of any class of securities issued by Mego,
the Master Servicer, the Depositor or any of their respective affiliates, as the
case may be.

        Independent Accountants: A firm of nationally recognized certified
public accountants which is Independent.

        Independent Contractor:  As defined in Section 4.14(b).

        Insurance Policies: With respect to any Property, any related insurance
policy.

        Insurance Proceeds: With respect to any Property, all amounts collected
in respect of Insurance Policies and not required to be applied to the
restoration of the related Property or paid to the related Obligor.

        Interest Advance:  As defined in Section 4.08(a).


                                       10


<PAGE>   15



        Interest Determination Date: With respect to any Accrual Period, the
second London Business Day preceding the commencement of such Accrual Period.

        Issuer: The Trust.

        London Business Day: Any day on which banks in the City of London or New
York City are open and conducting transactions in United States dollars.

        Loss Reimbursement Entitlement: With respect to any Distribution Date
and the Class M-1 Notes, Class M-2 Notes or the Certificates, the amount of
Allocable Loss Amounts applied to the reduction of the Class Principal Balance
of such Class pursuant to Section 5.02 and not reimbursed pursuant to Section
5.01 or 5.03 hereof as of such Distribution Date, plus (in the case of the Class
M-1 Notes and Class M-2 Notes) interest accrued on the unreimbursed portion
thereof at the applicable Note Interest Rate through the end of the Due Period
immediately preceding such Distribution Date; however, no interest shall accrue
on any amount of any such accrued and unpaid interest.

        Majority Securityholders: (i) Until such time as the sum of the
Aggregate Note Principal Balance has been reduced to zero, the holder or holders
of in excess of 50% of the Class Principal Balance of all Classes of Notes (as a
result of which the holders of the Certificates and the Residual Instruments
shall be excluded from any rights or actions of the Majority Securityholders
during such period); (ii) thereafter and until such time as the Class Principal
Balance of the Certificate has been reduced to zero, the holder or holders of in
excess of 50% of the Class Principal Balance of the Certificates (as a result of
which the holders of the Residual Instruments shall be excluded from any rights
or actions of the Majority Securityholders during such period); and (iii)
thereafter, the holder or holders of in excess of 50% of the Percentage Interest
of the Residual Instruments.

        Master Servicer: Norwest Bank Minnesota, N.A., a national banking
association, its successors in interest or any successor master servicer
appointed as herein provided.

        Master Servicer Certificate: As defined in Section 6.01.

        Master Servicer Fee: With respect to any Distribution Date, 1/12 times
0.08% times the Pool Principal Balance as of the opening of business on the
first day of the month preceding the month of such Distribution Date (or, with
respect to the first Distribution Date, the Original Pool Principal Balance).

        Master Servicer Termination Event: Any event specified in Section 10.01.

        Master Servicing Officer: Any officer of the Master Servicer responsible
for the administration and servicing of the Home Loans whose name and specimen
signature appears on a list of servicing officers furnished to the Indenture
Trustee by the Master Servicer, as such list may from time to time be amended.


                                       11


<PAGE>   16




        Maturity Date: With respect to any Home Loan and as of any date of
determination, the date on which the last payment of principal is due and
payable under the related Debt Instrument.

        Mezzanine Notes:  The Class M-1 Notes and the Class M-2 Notes.

        Monthly Cut-Off Date: The last day of any calendar month, and with
respect to any Distribution Date or related Determination Date, the last day of
the calendar month immediately preceding such Distribution Date or related
Determination Date.

        Monthly Payment: With respect to any Home Loan and any Due Period, the
payment of principal and interest due in such Due Period from the Obligor
pursuant to the related Debt Instrument (as amended or modified, if applicable,
pursuant to Section 4.10). The Monthly Payment related to a Determination Date
or a Distribution Date shall be the Monthly Payment due for the preceding Due
Period.

        Moody's:  Moody's Investors Service, Inc., or any successor thereto.

        Mortgage: With respect to any Mortgage Loan, the mortgage, deed of trust
or other instrument creating a mortgage lien (and in a title theory state the
document conveying title to the Property as security for the related Loan) or
other security interest on the related Property.

        Mortgage Loan: As of any date of determination, each of the Home Loans,
secured by an interest in a Property, transferred and assigned to the Indenture
Trustee pursuant to Section 2.01(a).

        Mortgagee or Obligee: With respect to any Home Loan as of any date of
determination, the holder of the related Debt Instrument and any related
Mortgage as of such date.

        Mortgagor or Obligor: With respect to any Home Loan, the obligor(s) on
the related Debt Instrument.

        Net Delinquency Calculation Amount: With respect to any Distribution
Date, beginning with the sixth Distribution Date, the excess, if any, of (x) the
product of (a) the product of 2.5 times the 61+ Delinquency Percentage (Rolling
Six-Month) times (b) the Pool Principal Balance as of the preceding Due Period
over (y) the aggregate of the amounts of Excess Spread for the three preceding
Distribution Dates.

        Net Loan Losses: With respect to any Distribution Date and the Home
Loans that become Defaulted Home Loans during the immediately preceding Due
Period, the aggregate Principal Balance of such Defaulted Home Loans as of the
last day of such Due Period, after giving effect to any recoveries attributable
to principal from whatever source received during such Due Period with respect
to such Defaulted Home Loans, including without limitation any Insurance
Proceeds.


                                       12


<PAGE>   17



        Net Loan Rate: With respect to each Home Loan, the related Home Loan
Interest Rate, less the rate at which the Servicer Fee is calculated.

        Nonrecoverable Advances: With respect to any Home Loan, (i) any Interest
Advance previously made and not reimbursed pursuant to Section 5.01(c)(i)(b), or
(ii) an Interest Advance proposed to be made in respect of a Home Loan which, in
either case, in the good faith business judgment of the Master Servicer, as
evidenced by an Officer's Certificate delivered to Mego and the Indenture
Trustee no later than the Business Day following such determination, would not
be recoverable ultimately from the Payments received in subsequent Due Periods
in respect of that Home Loan.

        Note(s): One or more of the Senior Notes, the Class M-1 Notes and the
Class M-2 Notes.

        Note Distribution Account: The account established and maintained
pursuant to Section 5.01(a)(2).

        Noteholder: A holder of a Note.

        Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and each Class of Notes, the sum of (i) the excess of (A) the
applicable Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Noteholders' Interest Carry-Forward Amount
for such Class on such preceding Distribution Date, over (B) the amount in
respect of interest that is actually paid on such Class of Notes on such
preceding Distribution Date plus (ii) interest on such excess, to the extent
permitted by law, at the applicable Note Interest Rate from such preceding
Distribution Date through the current Distribution Date.

        Noteholders' Interest Distributable Amount: With respect to each
Distribution Date and each Class of Notes, the sum of the applicable
Noteholders' Monthly Interest Distributable Amount and the applicable
Noteholders' Interest Carry-Forward Amount for such Class of Notes, if any, for
such Distribution Date.

        Noteholders' Monthly Interest Distributable Amount: With respect to each
Distribution Date and Class of Notes, interest accrued during the related
Accrual Period at the respective Note Interest Rate for such Class of Notes on
the Class Principal Balance of such Class immediately preceding such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date).

        Note Interest Rate: With respect to each Class of Notes, the per annum
rate of interest payable to the holders of such Class of Notes. The Note
Interest Rate with respect to the Class A-1 Notes is the lesser of (a) the sum
of (i) One-Month LIBOR and (ii) 0.14% or (b) 12.00%; the Note Interest Rate with
respect to the Class A-2 Notes is equal to 6.81% per annum; the Note Interest
Rate with respect to the Class A-3 Notes is equal to 7.05% per annum; the Note
Interest Rate with respect to the Class A-4 Notes is equal to 7.39% per annum;
the Note Interest Rate


                                       13


<PAGE>   18



with respect to the Class M-1 Notes is equal to 7.50% per annum; and the Note
Interest Rate with respect to the Class M-2 Notes is equal to 7.67% per annum;
provided, however, with respect to the Class A-4, Class M-1 and Class M-2 Notes
with respect to any Distribution Date after the first Distribution Date on which
either Mego or the Master Servicer may exercise its option to purchase the Home
Loans pursuant to Section 11.01(b), the Note Interest Rate shall be 7.89%, 8.00%
and 8.17% per annum, respectively.

        Note Register: The register established pursuant to Section 2.3 of the
Indenture.

        Obligee:  See Mortgagee.

        Obligor:  See Mortgagor.

        Officer's Certificate: A certificate signed by (i) any Master Servicing
Officer or (ii) the Chairman of the Board, the Vice Chairman of the Board, the
President, a Vice President, an Assistant Vice President, the Treasurer, the
Secretary or one of the Assistant Treasurers or Assistant Secretaries of the
Depositor or Mego, as the case may be, as required by this Agreement.

        One-Month LIBOR: With respect to any Accrual Period and the Class A-1
Notes, the rate determined by the Indenture Trustee on the related Interest
Determination Date on the basis of the offered rates of the Reference Banks for
one-month United States dollar deposits, as such rates appear on the Telerate
Screen 3750, as of 11:00 a.m. (London time) on such Interest Determination Date.
On each Interest Determination Date, One-Month LIBOR for the related Accrual
Period will be established by the Indenture Trustee as follows:

                (i)     If on such Interest Determination Date two or more
                        Reference Banks provide such offered quotations,
                        One-Month LIBOR for the related Accrual Period shall be
                        the arithmetic mean of such offered quotations (rounded
                        upwards if necessary to the nearest whole multiple of
                        0.0625%.

                (ii)    If on such Interest Determination Date fewer than two
                        Reference Banks provide such offered quotations,
                        One-Month LIBOR for the related Accrual Period shall be
                        the higher of (i) One-Month LIBOR as determined on the
                        previous Interest Determination Date and (ii) the
                        Reserve Interest Rate.

        Opinion of Counsel. A written opinion of counsel (who is acceptable to
the Rating Agencies), who may be employed by Mego, the Master Servicer, the
Depositor or any of their respective affiliates.

        Original Class Principal Balance: In the case of the Class A-1 Notes,
$33,400,000; in the case of the Class A-2 Notes, $25,700,000; in the case of the
Class A-3 Notes, $6,500,000; in the case of the Class A-4 Notes, $9,451,000; in
the case of the Class M-1 Notes, $16,213,000; in the case of the Class M-2
Notes, $7,584,000 and in the case of the Certificates, $5,753,639.


                                       14


<PAGE>   19




        Original Pool Principal Balance: $104,601,639.24 which is the Pool
Principal Balance, as of the Cut-Off Date.

        Other Fees: With respect to any Distribution Date, (i) amounts in
respect of fees and expenses due to any provider of services to the Trust,
except the Indenture Trustee, the Master Servicer, the Servicer and also except
any Person, the fees of which are required by this Agreement to be paid by the
Master Servicer, the Servicer, or the Indenture Trustee; (ii) any taxes assessed
against the Trust; and (iii) the reasonable transition expenses of a successor
Master Servicer incurred in acting as successor Master Servicer.

        Overcollateralization Amount: With respect to any Distribution Date, the
amount equal to the excess of (A) the Pool Principal Balance as of the last day
of the related Due Period over (B) the aggregate of the Class Principal Balances
of the Securities (after giving effect to all distributions on the Classes of
Securities on such Distribution Date).

        Overcollateralization Deficiency Amount: With respect to any
Distribution Date, the excess, if any, of the Overcollateralization Target
Amount over the Overcollateralization Amount (such Overcollateralization Amount
to be calculated after giving effect to all prior distributions on the Classes
of Securities on such Distribution Date pursuant to Section 5.01(c)(i) and (ii)
hereof).

        Overcollateralization Target Amount: (A) With respect to any
Distribution Date occurring prior to the Stepdown Date, an amount equal to the
greater of (x) 8% of the Original Pool Principal Balance or (y) the Net
Delinquency Calculation Amount; (B) with respect to any other Distribution Date,
an amount equal to the greater of (x) 16% of the Pool Principal Balance as of
the end of the related Due Period or (y) the Net Delinquency Calculation Amount;
provided, however, that the Overcollateralization Target Amount shall in no
event be less than 0.50% of the Original Pool Principal Balance.

        Ownership Interest: As to any Security, any ownership or security
interest in such Security, including any interest in such Security as the holder
thereof and any other interest therein, whether direct or indirect, legal or
beneficial, as owner or as pledgee.

        Owner Trustee: Wilmington Trust Company, as owner trustee under the
Trust Agreement, and any successor owner trustee under the Trust Agreement.

        Owner Trustee Fee:  $4,000.

        Owner Trustee Fee Reserve: With respect to any Distribution Date,
$333.33.

        Payment: With respect to any Home Loan or the related Foreclosed
Property and any Distribution Date or related Determination Date, all amounts
received or collected on account of principal and interest by or on behalf of
the Master Servicer during the preceding Due Period (or with respect to the
interest component of any Monthly Payment due during such Due Period,


                                       15


<PAGE>   20



received or collected by or on behalf of the Master Servicer during the period
commencing on the first day of the preceding Due Period and ending prior to such
Determination Date) in respect of such Home Loan or Foreclosed Property from
whatever source, including without limitation, amounts received or collected
from, or representing:

                (i)     the related Obligor;

                (ii)    the application to amounts due on such Home Loan (or, in
        the case of any Foreclosed Property, to amounts previously due on the
        related Foreclosed Loan) of any related Insurance Proceeds (to the
        extent provided in Section 4.16(b)), any related condemnation awards or
        settlements or any payments made by any related guarantor or third-party
        credit-support provider;

                (iii)   the operation or sale of the related Foreclosed
        Property;

                (iv)    the Purchase Price with respect to such Home Loan or
        Substitution Adjustment Amounts with respect thereto; or

                (v)     the Termination Price pursuant to Section 11.01(b);

provided, however, that any amount the Servicer shall be entitled to retain as
additional servicer compensation pursuant to Section 6.05(a) of the Servicing
Agreement shall be excluded from the calculation of Payment.

        Percentage Interest:  As defined in the Trust Agreement.

        Permitted Investments:  Each of the following:

                (a)     Direct obligations of the United States of America
(including obligations issued or held in book-entry form on the books of the
Department of the Treasury, and CATS and TIGRS) or obligations the principal of
and interest on which are unconditionally guaranteed by the United States of
America.

                (b)     Bonds, debentures, notes or other evidence of
indebtedness issued or guaranteed by any of the following federal agencies and
provided such obligations are backed by the full faith and credit of the United
States of America (stripped securities are only permitted if they have been
stripped by the agency itself):

                1.      U.S. Export-Import Bank (Eximbank)

                        A.      Direct obligations or fully guaranteed
                                certificates of beneficial ownership

                2.      Farmers Home Administration (FmHA)

                        A.      Certificates of beneficial ownership


                                       16


<PAGE>   21




                3.      Federal Financing Bank

                4.      Federal Housing Administration (FHA)

                        A.      Debentures

                5.      General Services Administration

                        A.      Participation certificates

                6.      U.S. Maritime Administration

                        A.      Guaranteed Title XI financing

                7.      U.S. Department of Housing and Urban Development (HUD)

                        A.      Project Notes 

                        B.      Local Authority Bonds

                        C.      New Communities Debentures - U.S. government
                                guaranteed debentures

                        D.      U.S. Public Housing Notes and Bonds - U.S.
                                government guaranteed public housing notes and
                                bonds

                (c)     Bonds, debentures, notes or other evidence of
indebtedness issued or guaranteed by any of the following non-full faith and
credit U.S. government agencies that are rated by both Rating Agencies in either
the highest long-term rating categories or in one of the top two highest
short-term rating categories (stripped securities are only permitted if they
have been stripped by the agency itself):

                1.      Federal Home Loan Bank System

                        A.      Senior debt obligations

                2.      Federal Home Loan Mortgage Corporation (FHLMC)

                        A.      Participation Certificates

                        B.      Senior debt obligations

                3.      Federal National Mortgage Association (FNMA)

                        A.      Mortgage-backed securities and senior debt
                                obligations

                4.      Student Loan Marketing Association

                        A.      Senior debt obligations

                5.      Resolution Funding Corp. obligations

                6.      Farm Credit System

                        A.      Consolidated systemwide bonds and notes


                                       17


<PAGE>   22



                (d)     Money market funds registered under the Investment
Company Act of 1940, as amended, whose shares are registered under the
Securities Act, and having a rating by Standard & Poor's of AAAm-G; AAAm; or AAm
and a rating by Moody's of Aaa.

                (e)     Certificates of deposit secured at all times by
collateral described in (a) and/or (b) above. Such certificates must be issued
by commercial banks, savings and loan associations or mutual savings banks which
have a short term rating by Moody's of P-1 or higher and by Standard & Poor's of
A-1 or higher. The collateral must be held by a third party and the Indenture
Trustee must have a perfected first security interest in the collateral.

                (f)     Certificates of deposit, savings accounts, deposit
accounts or money market deposits which are fully insured by FDIC, including BIF
and SAIF.

                (g)     Investment agreements, including guaranteed investment
contracts, acceptable to each Rating Agency.

                (h)     Commercial paper rated "Prime - 1" by Moody's and "A-1"
or better by Standard & Poor's.

                (i)     Bonds or notes issued by any state or municipality which
are rated by Moody's and Standard & Poor's in the highest long term rating
categories or one of the two highest short-term rating categories assigned by
such agencies.

                (j)     Federal funds or bankers acceptances with a maximum term
of one year of any bank which has an unsecured, uninsured and unguaranteed
obligation rating of "Prime - 1" by Moody's and "A-1" or "A" or better by
Standard & Poor's.

                (k)     Repurchase agreements providing for the transfer of
securities from a dealer bank or securities firm (seller/borrower) to the Trust
(buyer/lender), and the transfer of cash from the Trust to the dealer bank or
securities firm with an agreement that the dealer bank or securities firm will
repay the cash plus a yield to the Trust in exchange for the securities at a
specified date.

                Repurchase agreements ("repos") must satisfy the following
criteria.

                1.      Repos must be between the Trust and a dealer bank or
                        securities firm which are:

                        A.      Primary dealers on the Federal Reserve reporting
                                dealer list which are rated A or better by
                                Standard & Poor's and P-1 by Moody's, or

                        B.      Banks rated "A" or above by Standard & Poor's
                                and P-1 by Moody's.


                                       18


<PAGE>   23



                2.      The written repo contract trust must include the
                        following:

                        A.      Securities which are acceptable for transfer
                                are:

                                (1)     Direct U.S. governments, or

                                (2)     Federal agencies backed by the full
                                        faith and credit of the U.S. government
                                        (or FNMA or FHLMC) other than mortgage
                                        backed securities.

                        B.      The term of the repo may be up to 30 days

                        C.      The collateral must be delivered to the
                                Indenture Trustee (if the Indenture Trustee is
                                not supplying the collateral) or third party
                                acting as agent for the Indenture Trustee (if
                                the Indenture Trustee is supplying the
                                collateral) before/simultaneous with payment
                                (perfection by possession of certificated
                                securities).

                        D.      Valuation of Collateral

                                (1)     The securities must be valued weekly,
                                        marked-to-market at current market price
                                        plus accrued interest.

                                (a)     The value of collateral must be equal to
                                        104% of the amount of cash transferred
                                        by the Trust to the dealer bank or
                                        security firm under the repo plus
                                        accrued interest. If the value of
                                        securities held as collateral slips
                                        below 104% of the value of the cash
                                        transferred by the Trust, then
                                        additional cash and/or acceptable
                                        securities must be transferred. If,
                                        however, the securities used as
                                        collateral are FNMA or FHLMC, then the
                                        value of collateral must equal 105%.

                3.      Legal opinion which must be delivered to the Indenture
                        Trustee:

                        a.      Repo meets guidelines under state law for legal
                                investment of public funds.

        Each reference in this definition of "Permitted Investments" to the
Rating Agency shall be construed, in the case of each subparagraph above
referring to each Rating Agency, as a reference to Standard & Poor's and
Moody's.


                                       19


<PAGE>   24



        Person: Any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, national banking
association, unincorporated organization or government or any agency or
political subdivision thereof.

        Physical Property:  As defined in the definition of "Delivery" above.

        Pool Principal Balance: With respect to any date of determination, the
sum of the Principal Balances for all Home Loans as of the end of the preceding
Due Period.

        Principal Balance: With respect to any Home Loan, and for any date of
determination, the Principal Balance of such Home Loan as of the Cut-Off Date
minus all principal reductions credited against the Principal Balance of such
Home Loan on or subsequent to the Cut-Off Date for such Home Loan; provided,
that with respect to any Defaulted Home Loan, the Principal Balance shall be
zero as of the end of the Due Period in which such Home Loan becomes a Defaulted
Home Loan.

        Property: The property (real, personal or mixed) encumbered by the
Mortgage which secures the Debt Instrument evidencing a secured Home Loan.

        Prospectus: The Depositor's final Prospectus, dated June 20, 1997, as
supplemented by the Prospectus Supplement.

        Prospectus Supplement: The Prospectus Supplement dated as of June 27,
1997, prepared by the Seller and the Depositor in connection with the issuance
and sale of the Securities.

        Purchase Price: With respect to a Home Loan, means the Principal Balance
of such Home Loan as of the date of purchase, plus unpaid accrued interest at
the related Home Loan Interest Rate to the last day of the month in which such
purchase occurs (without regard to any Interest Advance that may have been made
with respect to such Home Loan).

        Qualified Substitute Home Loan: A Home Loan: (i) having characteristics
such that the representations and warranties made pursuant to Section 3.03(b)
with respect to the Home Loans are true and correct as of the date of
substitution with respect to such Home Loan; (ii) each Monthly Payment with
respect to such Home Loan shall be greater than or equal to the Monthly Payments
due in the same Due Period on the Home Loan for which such Qualified Substitute
Home Loan is replacing; (iii) the Maturity Date with respect to such Home Loan
shall be no later than the Maturity Date of the Home Loan for which such
Qualified Substitute Home Loan is replacing; (iv) as of the date of
substitution, the Principal Balance of such Home Loan is less than or equal to
(but not more than 1% less than) the Principal Balance of the Home Loan for
which such Qualified Substitute Home Loan is replacing; (v) the Home Loan
Interest Rate with respect to such Home Loan is at least equal to the Home Loan
Interest Rate of the Home Loan for which such Qualified Substitute Home Loan is
replacing and (vi) with respect to which the FICO score is equal to or greater
than the FICO score for such Home Loan for which such Qualified Substitute Home
Loan is replacing; provided however, in the event more than one Qualified


                                       20


<PAGE>   25



Substitute Home Loan is replacing one or more Defective Home Loans on any date,
in which case (i) the weighted average Home Loan Interest Rate for such
Qualified Substitute Home Loans must equal or exceed the weighted average Home
Loan Interest Rate of the Defective Home Loans immediately prior to giving
effect to the substitution, in each case weighted on the basis of the
outstanding Principal Balance of such loans as of such day, (ii) the sum of the
Monthly Payments with respect to such Qualified Substitute Home Loans shall be
greater than or equal to the Monthly Payments due in the same Due Period on the
Defective Home Loans being replaced, and (iii) as of the date of substitution,
the aggregate Principal Balances of such Qualified Substitute Home Loans are
less than or equal to (but not more than 1% less than) the aggregate Principal
Balances of the Defective Home Loans being replaced.

        Rating Agency or Rating Agencies: Any of (i) Standard & Poor's, (ii)
Fitch, or (iii) DCR or, if no such organization or successor is any longer in
existence, "Rating Agency" shall be a nationally recognized statistical rating
organization or other comparable person designated by the Issuer, notice of
which designation shall have been given to the Indenture Trustee and the Master
Servicer.

        Ratings: The ratings initially assigned to the Notes and the
Certificates by the Rating Agencies, as evidenced by letters from the Rating
Agencies.

        Record Date: With respect to each Distribution Date, other than the
first Distribution Date, the close of business on the last Business Day of the
month immediately preceding the month in which such Distribution Date occurs
and, with respect to the first Distribution Date, July 3, 1997.

        Reference Banks: Bankers Trust Company, Barclay's Bank Plc, The Bank of
Tokyo and National Westminster Bank Plc; provided that if any of the foregoing
banks are not suitable to serve as a Reference Bank, then any leading banks
selected by the Indenture Trustee which are engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, England, (ii) not controlling, under
the control of or under common control with the Depositor or any affiliate
thereof, (iii) whose quotations appear on the Telerate Screen 3750 on the
relevant Interest Determination Date and (iv) which have been designated as such
by the Indenture Trustee.

        Regular Distribution Amount: With respect to any Distribution Date, the
lesser of (a) the Collected Amount less the amounts required to be distributed
pursuant to Section 5.01(c)(i) on such Distribution Date or (b) the sum of (i)
the Noteholders' Interest Distributable Amount, (ii) the Certificateholders'
Interest Distributable Amount and (iii) the Regular Principal Distribution
Amount, in each case for such Distribution Date.

        Regular Principal Distribution Amount: With respect to each Distribution
Date, an amount equal to the lesser of:


                                       21


<PAGE>   26



        (A)     the aggregate of the Class Principal Balances of the Classes of
Securities immediately prior to such Distribution Date; or

        (B)     The sum of the following amounts (without duplication) with
respect to the immediately preceding Due Period: that portion of all Payments
received on Home Loans allocable to principal for such Distribution Date,
including all full and partial principal prepayments (including (i) such
payments in respect of such Home Loans that became Defaulted Home Loans on or
prior to the end of the preceding Due Period, (ii) the portion of the Purchase
Price allocable to principal of all Defective Loans or Defaulted Loans and the
portion of the Termination Price, if any, set forth in Section 11.01(b)
allocable to principal with respect to the Home Loans, and (iii) any
Substitution Adjustment Amounts deposited to the Note Distribution Account
pursuant to Section 3.05 on the previous Determination Date).

        Reserve Interest Rate: With respect to any Interest Determination Date,
the rate per annum that the Indenture Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole multiple of
0.0625%) of the one-month United States dollar lending rates which New York City
banks selected by the Indenture Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in the
London interbank market or (ii) in the event that the Indenture Trustee can
determine no such arithmetic mean, the lowest one-month United States dollar
lending rate which New York City banks selected by the Indenture Trustee are
quoting on such Interest Determination Date to leading European banks.

        Residual Instruments: The instruments evidencing the right to the amount
remaining, if any, after all prior distributions have been made under this
Agreement, the Indenture and the Trust Agreement on each Distribution Date and
certain other rights to receive amounts hereunder and under the Trust Agreement.

        Responsible Officer: When used with respect to the Indenture Trustee,
any officer within the Corporate Trust Office of the Indenture Trustee,
including any Vice President, Assistant Vice President, Secretary, Assistant
Secretary or any other officer of the Indenture Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also, with respect to a particular matter, any other officer to whom such matter
is referred because of such officer's knowledge of and familiarity with the
particular subject. When used with respect to the Issuer, any officer in the
Corporate Trust Administration Department of the Owner Trustee with direct
responsibility for the administration of the Trust Agreement and this Agreement
on behalf of the Issuer. When used with respect to the Depositor, the Seller or
the Master Servicer, the President or any Vice President, Assistant Vice
President, or any Secretary or Assistant Secretary.

        SAIF: The Savings Association Insurance Fund, as from time to time
constituted, created under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, or if at any time after the execution of this
instrument the Savings Association Insurance Fund is not existing and performing
duties now assigned to it, the body performing such duties on such date.


                                       22


<PAGE>   27




        Securities:  The Notes and/or the Certificates, as applicable.

        Securities Act:  The Securities Act of 1933, as amended.

        Securityholder:  A holder of a Note or Certificate, as applicable.

        Seller: Mego, in its capacity as the seller hereunder.

        Senior Notes:  The Class A-1, Class A-2, Class A-3 and Class A-4 Notes.

        Senior Optimal Principal Balance: With respect to any Distribution Date
prior to the Stepdown Date, zero; with respect to any other Distribution Date,
an amount equal to the Pool Principal Balance as of the preceding Determination
Date minus the greater of (a) the sum of (1) 56.50% of the Pool Principal
Balance as of the preceding Determination Date and (2) the Overcollateralization
Target Amount for such Distribution Date (without giving effect to the proviso
in the definition thereof) or (b) 0.50% of the Original Pool Principal Balance;
provided however, that the Senior Optimal Principal Balance shall never be less
than zero or greater than the Aggregate Note Principal Balance as of the Closing
Date.

        Series or Series 1997-3: Mego Mortgage Home Loan Asset Backed
Securities, Series 1997-3.

        Servicer: Mego, in its capacity as the servicer hereunder, or any other
Eligible Servicer with whom the Master Servicer has entered into a Servicing
Agreement pursuant to Section 4.02.

        Servicer Fee: With respect to any Distribution Date, 1/12 times 1.00%
times the Pool Principal Balance, as of the opening of business on the first day
of the month preceding the month of such Distribution Date (or, with respect to
the first Distribution Date, the Original Pool Principal Balance).

        Servicer Review Report: As defined in Section 4.05(d).

        Servicer Termination Event: With respect to the Servicing Agreement, the
events specified in Section 7.02 therein.

        Servicer's Home Loan Files: As defined in Section 2.05(b).

        Servicing Agreement: The servicing agreement dated as of June 14, 1997
between Mego, as Servicer, the Master Servicer, the Indenture Trustee and the
Trust and any other agreement entered into in accordance with Section 4.02.

        Standard & Poor's: Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor thereto.


                                       23


<PAGE>   28



        Stepdown Date: The first Distribution Date occurring after June 2000 as
to which all of the following conditions exist:

        (1)     the Pool Principal Balance has been reduced to an amount less
than or equal to 50% of the Original Pool Principal Balance;

        (2)     the Net Delinquency Calculation Amount is less than 8% of the
Original Pool Principal Balance; and

        (3)     the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will be
able to be reduced on such Distribution Date (such determination to be made by
the Indenture Trustee prior to making actual distributions on such Distribution
Date) to an amount equal to or less than the excess of (i) the Pool Principal
Balance as of the preceding Determination Date over (ii) the greater of (1) the
sum of (x) 56.50% of the Pool Principal Balance as of the preceding
Determination Date and (y) the Overcollateralization Target Amount for such
Distribution Date (such Overcollateralization Target Amount calculated without
giving effect to the proviso in the definition thereof and calculated pursuant
only to clause (B) in the definition thereof) or (2) 0.50% of the Original Pool
Principal Balance.

        Servicing Record. The records for each Home Loan maintained by the
Master Servicer pursuant to Section 4.03.

        Servicing Standard.  The standard set forth in Section 4.01(a).

        61+ Day Delinquent Loan. With respect to any Determination Date or
related Distribution Date, a Home Loan, other than a Defaulted Home Loan, with
respect to which any portion of a Monthly Payment is, as of the related Monthly
Cut-Off Date, 61 days or more past due (without giving effect to any grace
period and including Home Loans in foreclosure and Foreclosed Property that are
not otherwise Defaulted Home Loans) and unpaid by the Obligor.

        61+ Delinquency Percentage (Rolling Six Month). With respect to any
Determination Date or related Distribution Date, the average of the percentage
equivalents of the fractions determined for each of the six immediately
preceding Due Periods the numerator of each of which is equal to the aggregate
Principal Balance of Home Loans that are 61+ Day Delinquent Loans as of the end
of such Due Period and the denominator of which is the Pool Principal Balance as
of the end of such Due Period.

        Substitution Adjustment Amount: The meaning assigned to such term in
Section 3.05.

        Substitution Date: As defined in Section 3.05.

        Termination Date: The earlier of (a) the Distribution Date in August
2023 and (b) the Distribution Date next following the Monthly Cut-Off Date
coinciding with or next following the


                                       24


<PAGE>   29



date of the liquidation or disposition of the last asset held by the Trust
pursuant to Sections 4.13 or 11.01.

        Termination Price:  As defined in Section 11.01(b).

        Total Expected Loan Loss Percentage: With respect to any Distribution
Date, the percentage equivalent of the fraction, the numerator of which is equal
to the sum of (a) Cumulative Net Losses for such Distribution Date, (b) 25% of
the aggregate Principal Balance of Home Loans which are between 31 and 60 days
past due (without giving effect to any grace period) as of the last day of the
preceding Due Period, (c) 50% of the aggregate Principal Balance of Home Loans
which are between 61 and 90 days past due (without giving effect to any grace
period) as of the last day of the preceding Due Period, (d) the aggregate
Principal Balance of the Home Loans which are more than 90 days past due
(without giving effect to any grace period) as of the last day of the preceding
Due Period and the denominator of which is the Original Pool Principal Balance.

        Transaction Documents. This Agreement, the Home Loan Purchase Agreement,
the Trust Agreement, the Servicing Agreement, the Indenture and the
Administration Agreement.

        Trust: The Issuer.

        Trust Account Property: The Trust Accounts, all amounts and investments
held from time to time in any Trust Account and all proceeds of the foregoing.

        Trust Accounts: The Note Distribution Account, the Certificate
Distribution Account and the Collection Account.

        Trust Agreement: The Trust Agreement dated as of June 14, 1997, among
the Depositor, the Co-Owner Trustee, the Owner Trustee and Mego Mortgage
Corporation.

        Trust Estate: The assets subject to this Agreement, the Trust Agreement
and the Indenture and assigned to the Indenture Trustee, which assets consist
of: (i) such Home Loans as from time to time are subject to this Agreement,
including Qualified Substitute Home Loans added to the Trust from time to time,
together with the Servicer's Home Loan Files and the Indenture Trustee's Home
Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and
security interests in Properties, (iii) all payments of principal in respect of
Home Loans received on or after the Cut-Off Date and payments of interest in
respect of Home Loans due on or after the Cut-Off Date, (iv) such assets as from
time to time are identified as Foreclosed Property, (v) such assets and funds as
are from time to time deposited in the Collection Account, the Note Distribution
Account and the Certificate Distribution Account, including amounts on deposit
in such accounts which are invested in Permitted Investments, (vi) the Issuer's
rights under the Insurance Policies and any Insurance Proceeds, and (vii) all
right, title and interest of the Depositor in and to the obligations of the
Seller under the Home Loan Purchase Agreement in which the Depositor acquired
the Home Loans from the Seller.


                                       25


<PAGE>   30




        Section 1.02 Other Definitional Provisions.

        (a)     Capitalized terms used herein and not otherwise defined herein
have the meanings assigned to them in the Indenture and the Trust Agreement.

        (b)     All terms defined in this Agreement shall have the defined
meanings when used in any certificate or other document made or delivered
pursuant hereto unless otherwise defined therein.

        (c)     As used in this Agreement and in any certificate or other
document made or delivered pursuant hereto or thereto, accounting terms not
defined in this Agreement or in any such certificate or other document, and
accounting terms partly defined in this Agreement or in any such certificate or
other document to the extent not defined, shall have the respective meanings
given to them under generally accepted accounting principles. To the extent that
the definitions of accounting terms in this Agreement or in any such certificate
or other document are inconsistent with the meanings of such terms under
generally accepted accounting principles, the definitions contained in this
Agreement or in any such certificate or other document shall control.

        (d)     The words "hereof," "herein," "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; Article, Section, Schedule
and Exhibit references contained in this Agreement are references to Articles,
Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified; and the term "including" shall mean "including without limitation."

        (e)     The definitions contained in this Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such terms.

        (f)     Any agreement, instrument or statute defined or referred to
herein or in any instrument or certificate delivered in connection herewith
means such agreement, instrument or statute as from time to time amended,
modified or supplemented and includes (in the case of agreements or instruments)
references to all attachments thereto and instruments incorporated therein;
references to a Person are also to its permitted successors and assigns.

        Section 1.03 Interest Calculations.

        Except as otherwise set forth herein, all calculations of accrued
interest on the Home Loans, the Notes (except the Class A-1 Notes), the
Certificates and accrued fees shall be made on the basis of a 360-day year
consisting of twelve 30-day months.


                                       26


<PAGE>   31



                                   ARTICLE II.

                          CONVEYANCE OF THE HOME LOANS

        Section 2.01 Conveyance of the Home Loans.

        (a)     As of the Closing Date, in consideration of the Issuer's
delivery of the Notes, Certificates and Residual Instruments to the Depositor or
its designee, upon the order of the Depositor, the Depositor, as of the Closing
Date and concurrently with the execution and delivery hereof, does hereby sell,
transfer, assign, set over and otherwise convey to the Issuer, without recourse,
but subject to the other terms and provisions of this Agreement, all of the
right, title and interest of the Depositor in and to the Trust Estate. The
foregoing sale, transfer, assignment, set over and conveyance does not and is
not intended to result in a creation or an assumption by the Issuer of any
obligation of the Depositor, the Seller or any other person in connection with
the Trust Estate or under any agreement or instrument relating thereto except as
specifically set forth herein.

        (b)     As of the Closing Date, the Issuer acknowledges the conveyance
to it of the Trust Estate, including from the Depositor all right, title and
interest of the Depositor in and to the Trust Estate, receipt of which is hereby
acknowledged by the Issuer, and the acceptance of which is made in good faith
and without notice or knowledge of any adverse claims or liens. Concurrently
with such delivery and in exchange therefor, the Issuer has pledged to the
Indenture Trustee the Trust Estate, and the Indenture Trustee, pursuant to the
written instructions of the Issuer, has executed and caused to be authenticated
and delivered the Notes to the Depositor or its designee, upon the order of the
Issuer. In addition, concurrently with such delivery and in exchange therefor,
the Owner Trustee, pursuant to the instructions of the Depositor, has executed
(not in its individual capacity, but solely as Owner Trustee on behalf of the
Issuer) and caused to be authenticated and delivered the Certificates and
Residual Instruments to the Depositor or its designee, upon the order of the
Depositor.

        Section 2.02 Reserved.

        Section 2.03 Ownership and Possession of Home Loan Files.

        Upon the issuance of the Securities, with respect to the Home Loans, the
ownership of each Debt Instrument, the related Mortgage and the contents of the
related Servicer's Home Loan File and the Indenture Trustee's Home Loan File
shall be vested in the Owner Trustee and the Co-Owner Trustee and pledged to the
Indenture Trustee for the benefit of the Noteholders, although possession of the
Servicer's Home Loan Files (other than items required to be maintained in the
Indenture Trustee's Home Loan Files) on behalf of and for the benefit of the
Securityholders shall remain with Mego, and the Indenture Trustee shall take
possession of the Indenture Trustee's Home Loan Files as contemplated in Section
2.06.


                                       27


<PAGE>   32



        Section 2.04 Books and Records.

        The sale of each Home Loan shall be reflected on the Depositor's or the
Seller's, as the case may be, balance sheets and other financial statements as a
sale of assets by the Depositor or the Seller, as the case may be, under
generally accepted accounting principles ("GAAP"). The Master Servicer shall
maintain, or cause to be maintained pursuant to Section 4.03, a complete set of
books and records for each Home Loan which shall be clearly marked to reflect
the ownership of each Home Loan by the Owner Trustee and the Co-Owner Trustee
and the pledge to the Indenture Trustee for the benefit of the Securityholders.

        It is the intention of the parties hereto that the transfers and
assignments contemplated by this Agreement shall constitute a sale of the Home
Loans and the other property specified in Section 2.01(a) from the Depositor to
the Trust and such property shall not be property of the Depositor. If the
assignment and transfer of the Home Loans and the other property specified in
this Section 2.01(a) to the Owner Trustee and Co-Owner Trustee pursuant to this
Agreement or the conveyance of the Home Loans or any of such other property to
the Owner Trustee and Co-Owner Trustee is held or deemed not to be a sale or is
held or deemed to be a pledge of security for a loan, the Depositor intends that
the rights and obligations of the parties shall be established pursuant to the
terms of the Agreement and that, in such event, (i) the Depositor shall be
deemed to have granted and does hereby grant to the Owner Trustee and Co-Owner
Trustee a first priority security interest in the entire right, title and
interest of the Depositor in and to the Home Loans and all other property
conveyed to the Owner Trustee and Co-Owner Trustee pursuant to Section 2.01 and
all proceeds thereof, and (ii) this Agreement shall constitute a security
agreement under applicable law. Within five days of the Closing Date, the
Depositor shall cause to be filed UCC-1 financing statements naming the Owner
Trustee and Co-Owner Trustee as "secured parties" and describing the Home Loans
being sold by the Depositor to the Trust with the office of the Secretary of
State of the State in which the Depositor is located.

        Section 2.05 Delivery of Home Loan Documents.

        (a)     With respect to each Home Loan, on the Closing Date the Seller,
at the direction of the Depositor, shall have delivered or caused to be
delivered to the Indenture Trustee each of the following documents
(collectively, the "Indenture Trustee's Home Loan Files"):

                (i)     The original Debt Instrument, showing a complete chain
        of endorsements or assignments from the named payee to the Trust and
        endorsed as follows: "Pay to the order of First Bank National
        Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage
        Home Loan Owner Trust 1997-3, without recourse";

                (ii)    If such Home Loan is a Mortgage Loan, the original
        Mortgage with evidence of recording indicated thereon (except that a
        true copy thereof certified by an appropriate public official may be
        substituted); provided, however, that if the Mortgage with evidence of
        recording thereon cannot be delivered concurrently with the execution
        and delivery of this Agreement solely because of a delay caused by the
        public recording


                                       28


<PAGE>   33



        office where such Mortgage has been delivered for recordation, there
        shall be delivered to the Indenture Trustee a copy of such Mortgage
        certified as a true copy in an Officer's Certificate which shall certify
        that such Mortgage has been delivered to the appropriate public
        recording office for recordation, and there shall be promptly delivered
        to the Indenture Trustee such Mortgage with evidence of recording
        indicated thereon upon receipt thereof from the public recording
        official (or a true copy thereof certified by an appropriate public
        official may be delivered to the Indenture Trustee);

                (iii)   If such Home Loan is a Mortgage Loan, the original
        Assignment of Mortgage, in recordable form. Such assignments may be
        blanket assignments, to the extent such assignments are effective under
        applicable law, for Mortgages covering Mortgaged Properties situated
        within the same county. If the Assignment of Mortgage is in blanket form
        an assignment of Mortgage need not be included in the individual Home
        Loan File;

                (iv)    If such Home Loan is a Mortgage Loan, all original
        intervening assignments of the Mortgage, showing a complete chain of
        assignments from the named mortgagee to the assignor to the Indenture
        Trustee, with evidence of recording thereon (or true copies thereof
        certified by appropriate public officials may be substituted); provided,
        however, that if the intermediate assignments of mortgage with evidence
        of recording thereon cannot be delivered concurrently with the execution
        and delivery of this Agreement solely because of a delay caused by the
        public recording office where such assignments of Mortgage have been
        delivered for recordation, there shall be delivered to the Indenture
        Trustee a copy of each such assignment of Mortgage certified as a true
        copy in an Officer's Certificate of Mego, which shall certify that each
        such assignment of Mortgage has been delivered to the appropriate public
        recording office for recordation, and there shall be promptly delivered
        to the Indenture Trustee such assignments of Mortgage with evidence of
        recording indicated thereon upon its receipt thereof from the public
        recording official (or true copies thereof certified by an appropriate
        public official may be delivered to the Indenture Trustee);

                (v)     An original of each assumption or modification
        agreement, if any, relating to such Home Loan.

        (b)     With respect to each Home Loan, on the Closing Date, the Seller,
at the direction of the Depositor, shall have delivered or caused to be
delivered to Mego, as the designated agent of the Indenture Trustee each of the
following documents (collectively, the "Servicer's Home Loan Files"): (A) an
original or copy of truth-in-lending disclosure, (B) an original or copy of the
credit application, (C) an original or copy of the consumer credit report, (D)
an original or copy of verification of employment and income, or verification of
self-employment income, (E) an original or copy of contract of work or written
description with cost estimates, if applicable, (F) an original or copy of
report of inspection of improvements to the Property, if applicable, (G) to the
extent not included in (B), an original or a copy of a written verification, or
an underwriter's notation of obtaining a verbal verification from the holder of
any senior


                                       29


<PAGE>   34



mortgage or deed of trust that such Mortgagor at the time of origination was not
more than 30 days delinquent on any senior mortgage or deed of trust on the
Property, (H) (a) if the original principal balance is between $35,001 and
$40,000, (1) evidence that the borrower has a FICO Score of at least 640, a debt
to income ratio no greater than 45%, and disposable income of at least $1,500
per month, or (2) (I) a copy of the HUD-1 Closing Statement indicating the sale
price, or (II) an Uniform Residential Appraisal Report, or (III) a Drive-By
Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (IV) a tax
assessment, or (V) a broker's price opinion; (b) if the original principal
balance is between $40,001 and $50,000, (1) a copy of the HUD-1 Closing
Statement indicating the sale price, or (2) an Uniform Residential Appraisal
Report, or (3) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA
Form 2055, or (4) a tax assessment, or (5) a broker's price opinion; or (c) if
the original principal balance exceeds $50,000, a full Uniform Residential
Appraisal Report prepared by a national appraisal firm, and (I) an original or a
copy of a title search as of the time of origination with respect to the
Property.

        (c)     [Reserved]

        (d)     The Indenture Trustee shall take and maintain continuous
physical possession of the Indenture Trustee's Home Loan Files in the State of
Minnesota, and in connection therewith, shall act solely as agent for the
holders of the Securities in accordance with the terms hereof and not as agent
for Mego or any other party.

        (e)     Within 60 days of the Closing Date, Mego, at its own expense,
shall cause the Indenture Trustee to record each Assignment of Mortgage (which
may be a blanket assignment if permitted by applicable law) in the appropriate
real property or other records; provided, however, the Indenture Trustee need
not cause to be recorded any such Assignment of Mortgage which relates to a
Mortgage Loan in any jurisdiction under the laws of which, as evidenced by an
Opinion of Counsel delivered by Mego (at Mego's expense) to the Indenture
Trustee, and the Rating Agencies, the recordation of such Assignment of Mortgage
is not necessary to protect the Indenture Trustee's interest in the related
Mortgage Loan against the claims of any subsequent transferee or any creditor of
the Depositor or the Seller. With respect to any Assignment of Mortgage as to
which the related recording information is unavailable within 60 days following
the Closing Date, such Assignment of Mortgage shall be submitted for recording
within 30 days after receipt of such information but in no event later than one
year after the Closing Date. The Indenture Trustee shall be required to retain a
copy of each Assignment of Mortgage submitted for recording. In the event that
any such Assignment of Mortgage is lost or returned unrecorded because of a
defect therein, Mego shall promptly prepare a substitute Assignment of Mortgage
or cure such defect, as the case may be, and thereafter the Indenture Trustee
shall be required to submit each such Assignment of Mortgage Loan for recording.


                                       30


<PAGE>   35



        Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain
                     Substitutions; Initial Certification.

        (a)     The Indenture Trustee agrees to execute and deliver on the
Closing Date an acknowledgment of receipt of the Indenture Trustee's Home Loan
File for each Home Loan. The Indenture Trustee declares that it will hold such
documents and any amendments, replacements or supplements thereto, as well as
any other assets included in the Trust Estate, upon and subject to the
conditions set forth herein for the benefit of the Securityholders in good faith
and without notice of any adverse claims or liens. The Indenture Trustee agrees,
for the benefit of the Securityholders to review each Indenture Trustee's Home
Loan File within 45 days after the Closing Date (or, with respect to any
Qualified Substitute Home Loan, within 45 days after the conveyance of the
related Home Loan to the Trust) and to deliver to the Seller, the Depositor, the
Indenture Trustee, the Issuer and the Master Servicer a certification to the
effect that, as to each Home Loan listed in the Home Loan Schedule (other than
any Home Loan paid in full or any Home Loan specifically identified in such
certification as not covered by such certification), (i) all documents required
to be delivered to the Indenture Trustee pursuant to this Agreement are in its
possession (other than as expressly permitted in Section 2.05), (ii) all
documents delivered by the Depositor and the Seller to the Indenture Trustee
pursuant to Section 2.05 have been reviewed by the Indenture Trustee and have
not been mutilated or damaged and appear regular on their face (handwritten
additions, changes or corrections shall not constitute irregularities if
initialed by the Obligor) and relate to such Home Loan, (iii) based on the
examination of the Indenture Trustee, and only as to the foregoing documents,
the information set forth on the Home Loan Schedule accurately reflects the
information set forth in the Indenture Trustee's Home Loan File and (iv) each
Debt Instrument has been endorsed as provided in Section 2.05. Neither the
Issuer nor the Indenture Trustee shall be under any duty or obligation (i) to
inspect, review or examine any such documents, instruments, certificates or
other papers to determine that they are genuine, enforceable, or appropriate for
the represented purpose or that they are other than what they purport to be on
their face or (ii) to determine whether any Indenture Trustee's Home Loan File
should include any of the documents specified in Section 2.05(a)(v).

        (b)     The Servicer's Home Loan File shall be held in the custody of
Mego for the benefit of, and as agent for, the Securityholders, the Indenture
Trustee and the Issuer, as the owner thereof. It is intended that by Mego's
agreement pursuant to this Section 2.06(b) the Indenture Trustee shall be deemed
to have possession of the Servicer's Home Loan Files for purposes of Section
9-305 of the Uniform Commercial Code of the State in which such documents or
instruments are located. Mego shall promptly report to the Indenture Trustee any
failure by it to hold the Servicer's Home Loan File as herein provided and shall
promptly take appropriate action to remedy any such failure. In acting as
custodian of such documents and instruments, Mego agrees not to assert any legal
or beneficial ownership interest in the Home Loans or such documents or
instruments. Mego agrees to indemnify the Securityholders and the Indenture
Trustee for any and all liabilities, obligations, losses, damages, payments,
costs, or expenses of any kind whatsoever which may be imposed on, incurred by
or asserted against the Securityholders or the Indenture Trustee as the result
of any act or omission by Mego relating


                                       31


<PAGE>   36



to the maintenance and custody of such documents or instruments which have been
delivered to Mego; provided, however, that Mego will not be liable for any
portion of any such amount resulting from the negligence or misconduct of any
Securityholder or the Indenture Trustee and provided, further, that Mego will
not be liable for any portion of any such amount resulting from Mego's
compliance with any instructions or directions consistent with this Agreement
issued to Mego by the Indenture Trustee. The Indenture Trustee shall have no
duty to monitor or otherwise oversee Mego's performance as custodian hereunder.

        (c)     Upon determination by the Master Servicer, the Depositor, Mego
or the Indenture Trustee that any document constituting a part of any Home Loan
File was not delivered to the Indenture Trustee or, with respect to any document
constituting the Servicer's Home Loan File, to Mego, as custodian for the
Indenture Trustee and the Issuer, by the time required hereby (which in the case
of (A) a failure to deliver a recorded mortgage or recorded assignment pursuant
to Section 2.05(a)(ii) or (a)(iv) (only under the circumstances in which a delay
is caused by the public recording office and an Officer's Certificate is
required to be provided thereunder) shall be the 20 month anniversary of the
Closing Date, (B) a failure to deliver an inspection report pursuant to Section
2.05(b)(F) shall be the 12 month anniversary of the Closing Date, (C) a failure
to deliver each other document constituting a part of any Indenture Trustee's
Home Loan File shall be the Closing Date and (D) a failure to deliver each
document (other than those described in clause (B) above) specified in Section
2.05(b) shall be 45 Business Days after the Closing Date) to be so delivered or
was defective in any material respect when delivered to the Indenture Trustee,
the party identifying any of the foregoing shall give prompt written notice to
the other parties. Nothing contained herein shall require the Indenture Trustee
to undertake any independent investigation or to make any review of any Home
Loan File other than as provided for in this Section 2.06. Mego, upon receipt of
such notice, shall comply with the cure, substitution and repurchase provisions
of Section 3.05 hereof.


                                       32


<PAGE>   37



                                  ARTICLE III.

                         REPRESENTATIONS AND WARRANTIES

        Section 3.01 Representations and Warranties of the Depositor.

        The Depositor hereby represents, warrants and covenants with and to the
Issuer, and the Indenture Trustee, on behalf of the Securityholders, and the
Master Servicer, as of the Closing Date:

        (a)     The Depositor is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware and has all
licenses necessary to carry on its business as now being conducted. The
Depositor has the power and authority to execute and deliver this Agreement and
to perform in accordance herewith; the execution, delivery and performance of
this Agreement (including all instruments of transfer to be delivered pursuant
to this Agreement) by the Depositor and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action of the Depositor; this Agreement evidences the valid, binding and
enforceable obligation of the Depositor; and all requisite action has been taken
by the Depositor to make this Agreement valid, binding and enforceable upon the
Depositor in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium and other, similar laws relating to or
affecting creditors' rights generally or the application of equitable principles
in any proceeding, whether at law or in equity;

        (b)     The consummation of the transactions contemplated by this
Agreement will not result in (i) the breach of any terms or provisions of the
Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any
term or provision of, or conflict with or constitute a default under or result
in the acceleration of any obligation under, any material agreement, indenture
or loan or credit agreement or other material instrument to which the Depositor,
or its property is subject, or (iii) the violation of any law, rule, regulation,
order, judgment or decree to which the Depositor or its respective property is
subject;

        (c)     The Depositor is not in default with respect to any order or
decree of any court or any order, regulation or demand of any federal, state,
municipal or other governmental agency, which default might have consequences
that would materially and adversely affect the condition (financial or
otherwise) or operations of the Depositor or its properties or might have
consequences that would materially and adversely affect its performance
hereunder.

        Section 3.02 Representations, Warranties and Covenants of the Master
                     Servicer.

        The Master Servicer hereby represents, warrants and covenants with and
to the Depositor, the Issuer, Mego, the Indenture Trustee and the
Securityholders as of the Closing Date:

        (a)     The Master Servicer is a national banking association duly
organized and validly existing under the laws of the United States of America,
with full power and authority to own


                                       33


<PAGE>   38



its properties and conduct its business as such properties are presently owned
and such business is presently conducted;

        (b)     The Master Servicer has the full power and authority to execute,
deliver and perform, and to enter into and consummate all transactions
contemplated by this Agreement and each other Transaction Document to which it
is a party, has duly authorized the execution, delivery and performance of this
Agreement and each other Transaction Document to which it is a party, has duly
executed and delivered this Agreement and each other Transaction Document to
which it is a party, and this Agreement and each other Transaction Document to
which it is a party, when duly authorized, executed and delivered by the other
parties thereto, will constitute a legal, valid and binding obligation of the
Master Servicer, enforceable against it in accordance with its terms;

        (c)     Neither the execution and delivery of this Agreement or any
other Transaction Document to which the Master Servicer is a party, the
consummation of the transactions required of the Master Servicer herein or
therein, nor the fulfillment of or compliance with the terms and conditions of
this Agreement or any other Transaction Document to which the Master Servicer is
a party will conflict with or result in a breach of any of the terms, conditions
or provisions of the Master Servicer's charter or bylaws or any legal
restriction or any material agreement or instrument to which the Master Servicer
is now a party or by which it is bound, or which would adversely affect the
administration of the Trust as contemplated hereby, or constitute a material
default or result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or decree to which
the Master Servicer or its property is subject;

        (d)     The Master Servicer is not in default, and the execution and
delivery of this Agreement and each other Transaction Document to which it is a
party and its performance of and compliance with the terms hereof and thereof
will not constitute a violation of, any law, any order or decree of any court,
or any order, regulation or demand of any federal, state or local governmental
or regulatory authority;

        (e)     No action, suit or other proceeding or investigation is pending
or, to the Master Servicer's knowledge, threatened before any court or any
federal, state or local governmental or regulatory authority (A) asserting the
invalidity of this Agreement or any other Transaction Document to which the
Master Servicer is a party, (B) seeking to prevent the consummation of any of
the transactions contemplated by this Agreement or any other Transaction
Document to which the Master Servicer is a party, or (C) seeking any
determination or ruling that would materially and adversely affect the ability
of the Master Servicer to perform its obligations under this Agreement or any
other Transaction Document to which the Master Servicer is a party;

        (f)     No consent, approval, authorization or order of, registration or
filing with or notice to, any court or any federal, state or local government or
regulatory authority is required for the execution, delivery and performance by
the Master Servicer of this Agreement or any other


                                       34


<PAGE>   39



Transaction Document to which the Master Servicer is a party (other than those
that have been obtained or will be obtained prior to the Closing Date);

        (g)     Neither this Agreement nor any other Transaction Document to
which the Master Servicer is a party nor any statement, report or other document
furnished or to be furnished by the Master Servicer pursuant to this Agreement
or any other Transaction Document to which the Master Servicer is a party or in
connection with the transactions contemplated hereby and thereby contains any
untrue statement of material fact or omits to state a material fact necessary to
make the statements contained herein or therein not misleading;

        (h)     The statements contained in the section of the Prospectus
Supplement entitled "The Master Servicer" which describe the Master Servicer are
true and correct in all material respects, and such section of the Prospectus
Supplement does not contain any untrue statement of a material fact with respect
to the Master Servicer and does not omit to state a material fact necessary to
make the statements contained therein with respect to the Master Servicer not
misleading;

        (i)     The Master Servicer is solvent, and the Master Servicer will not
be rendered insolvent as a result of the performance of its obligations pursuant
to this Agreement and any other Transaction Document to which the Master
Servicer is a party;

        (j)     The Servicing Agreement conforms to the requirements for a
Servicing Agreement contained in this Agreement;

        (k)     The Master Servicer, or an affiliate thereof, the primary
business of which is the servicing of home loans such as the Home Loans, is an
Eligible Servicer, and the Master Servicer or such affiliate possesses all state
and federal licenses necessary for servicing the Home Loans in accordance with
this Agreement;

        (l)     The Master Servicer has not waived any default, breach,
violation or event of acceleration existing under any Debt Instrument or the
related Mortgage;

        (m)     The Master Servicer will cause to be performed any and all acts
required to be performed by the Master Servicer or Servicer to preserve the
rights and remedies of the Trust and the Indenture Trustee in any Insurance
Policies applicable to the Home Loans, including, without limitation, any
necessary notifications of insurers, assignments of policies or interests
therein, and establishments of co-insured, joint loss payee and mortgagee rights
in favor of the Trust and the Indenture Trustee;

        (n)     The Master Servicer shall comply with, and shall service, or
cause to be serviced, each Home Loan, in accordance with all applicable laws,
all rules and regulations issued thereunder, and all administrative publications
published pursuant thereto; and


                                       35


<PAGE>   40



        (o)     The Master Servicer agrees that, so long as it shall continue to
serve in the capacity contemplated under the terms of this Agreement, it shall
remain in good standing under the laws governing its creation and existence and
qualified under the laws of each state in which it is necessary to perform its
obligations under this Agreement or in which the nature of its business requires
such qualification, it shall maintain or cause an affiliate to maintain all
licenses, permits and other approvals required by any law or regulations, as may
be necessary to perform its obligations under this Agreement and to retain all
rights to service the Loans, and it shall not dissolve or otherwise dispose of
all or substantially all of its assets.

        It is understood and agreed that the representations and warranties set
forth in this Section 3.02 shall survive the issuance and delivery of the
Securities and shall be continuing as long as any Security shall be outstanding
or this Agreement has not been terminated.

        Section 3.03 Representations and Warranties of Mego.

        (a)     The Seller hereby represents and warrants to the Depositor, the
Issuer, the Indenture Trustee, the Master Servicer and the Securityholders, that
as of the Closing Date:

                (i)     Mego is a corporation duly organized, validly existing
        and in good standing under the laws of the State of Delaware. Mego is
        duly qualified to do business, is in good standing and has obtained all
        necessary licenses, permits, charters, registrations and approvals
        (together, "approvals") necessary for the conduct of its business as
        currently conducted and the performance of its obligations under the
        Transaction Documents, in each jurisdiction in which the failure to be
        so qualified or to obtain such approvals would render any Transaction
        Document unenforceable in any respect or would have a material adverse
        effect upon the Transaction;

                (ii)    Mego has full power and authority to execute, deliver
        and perform, and to enter into and consummate all transactions required
        of it by this Agreement and each other Transaction Document to which it
        is a party; has duly authorized the execution, delivery and performance
        of this Agreement and each other Transaction Document to which it is a
        party; has duly executed and delivered this Agreement and each other
        Transaction Document to which it is a party; when duly authorized,
        executed and delivered by the other parties hereto, this Agreement and
        each other Transaction Document to which it is a party will constitute a
        legal, valid and binding obligation of Mego enforceable against it in
        accordance with its terms, except as such enforceability may be limited
        by general principles of equity (whether considered in a proceeding at
        law or in equity);

                (iii)   Neither the execution and delivery of this Agreement or
        any of the other Transaction Documents to which Mego is a party, the
        consummation of the transactions required of it herein or under any
        other Transaction Document, nor the fulfillment of or compliance with
        the terms and conditions of this Agreement or any of the other
        Transaction Documents will conflict with or result in a breach of any of
        the


                                       36


<PAGE>   41



        terms, conditions or provisions of Mego's charter or by-laws or any
        legal restriction or any material agreement or instrument to which Mego
        is now a party or by which it is bound, or which would adversely affect
        the creation and administration of the Trust as contemplated hereby, or
        constitute a material default or result in an acceleration under any of
        the foregoing, or result in the violation of any law, rule, regulation,
        order, judgment or decree to which Mego or its respective property is
        subject;

                (iv)    There is no action, suit, proceeding, investigation or
        litigation pending against Mego or, to its knowledge, threatened, which,
        if determined adversely to Mego, would materially adversely affect the
        sale of the Loans, the issuance of the Securities and Residual
        Instruments, the execution, delivery or enforceability of this Agreement
        or any other Transaction Document, or which would have a material
        adverse affect on the financial condition of Mego;

                (v)     No consent, approval, authorization or order of any
        court or governmental agency or body is required for: (a) the execution,
        delivery and performance by Mego of, or compliance by Mego with, this
        Agreement, (b) the issuance of the Securities and Residual Instruments,
        (c) the sale of the Home Loans under the Home Loan Purchase Agreement or
        (d) the consummation of the transactions required of it by this
        Agreement, except: (A) such as shall have been obtained before the
        Closing Date, and (B) such as may be required under state securities or
        "Blue Sky" laws in connection with the sale of the Securities by the
        Underwriter;

                (vi)    Mego is not in default with respect to any order or
        decree of any court or any order, regulation or demand of any federal,
        state, municipal or governmental agency, which default might have
        consequences that would materially and adversely affect the condition
        (financial or other) or operations of Mego or its properties or might
        have consequences that would materially and adversely affect its
        performance hereunder;

                (vii)   Mego received fair consideration and reasonably
        equivalent value in exchange for the sale of the Home Loans to the
        Depositor;

                (viii)  Mego has transferred the Home Loans without any intent
        to hinder, delay or defraud any of its creditors;

        (b)     Mego hereby agrees for the benefit of the Depositor, the Issuer,
the Indenture Trustee and the Securityholders that the failure of any of the
following representations and warranties to be true and correct as to any Home
Loan as of the Cut-Off Date for such Home Loan, or such later date if so
specified in such representation and warranty, gives rise to the remedy
specified in Section 3.05;

                (i)     The information pertaining to each Home Loan set forth
        in the Home Loan Schedule was true and correct in all material respects
        as of the applicable Cut-Off Date;


                                       37


<PAGE>   42




                (ii)    As of the Cut-off Date, Home Loans representing 99.4% of
        the Original Pool Principal Balance are between 0 and 29 days past due
        and nineteen of the Home Loans representing 0.60% of the Original Pool
        Principal Balance are at least 30 days but no more than 59 days past due
        (without giving effect to any grace period); Mego has not advanced
        funds, induced, solicited or knowingly received any advance of funds
        from a party other than the Obligor, directly or indirectly, for the
        payment of any amount required by the Home Loan;

                (iii)   The terms of the Debt Instrument and the related
        Mortgage contain the entire agreement of the parties and have not been
        impaired, waived, altered or modified in any respect, except by written
        instruments reflected in the related File and recorded, if necessary, to
        maintain the lien priority of the related Mortgage; and no other
        instrument of waiver, alteration, expansion or modification has been
        executed, and no Obligor has been released, in whole or in part, except
        in connection with an assumption agreement which assumption agreement is
        part of the related Home Loan File and the payment terms of which are
        reflected in the related Home Loan Schedule;

                (iv)    The Debt Instrument and the related Mortgage are not
        subject to any set-off, claims, counterclaim or defense and will not
        have such in the future with respect to the goods and services provided
        under the Debt Instrument, including the defense of usury or of fraud in
        the inducement, nor will the operation of any of the terms of the Debt
        Instrument and the related Mortgage, or the exercise of any right
        thereunder, render such Debt Instrument or Mortgage unenforceable, in
        whole or in part, or subject to any right of rescission, set-off,
        counterclaim or defense, including the defense of usury, and no such
        right of rescission, set-off, counterclaim or defense has been asserted
        with respect thereto;

                (v)     Any and all requirements of any federal, state or local
        law applicable to the Home Loan (including any law applicable to the
        origination, servicing and collection practices with respect thereto)
        have been complied with;

                (vi)    No Debt Instrument or Mortgage has been satisfied,
        cancelled, rescinded or subordinated, in whole or part; and Mego has not
        waived the performance by the Obligor of any action, if the Obligor's
        failure to perform such action would cause the Debt Instrument or
        Mortgage Loan to be in default, except as otherwise permitted by clause
        (iii); and the related Property has not been released from the lien of
        the Mortgage, in whole or in part, nor has any instrument been executed
        that would effect any such satisfaction, subordination, release,
        cancellation or rescission;

                (vii)   Each Mortgage is a valid, subsisting and enforceable
        lien on the related Property, including the land and all buildings on
        the Property;

                (viii)  The Debt Instrument and the related Mortgage are genuine
        and each is the legal, valid and binding obligation of the maker
        thereof, enforceable in accordance


                                       38


<PAGE>   43



        with its terms, except as enforceability may be limited by bankruptcy,
        insolvency, reorganization or other similar laws affecting creditors'
        rights in general and by general principles of equity;

                (ix)    To Mego's best knowledge, all parties to the Debt
        Instrument and the related Mortgage had legal capacity at the time to
        enter into the Home Loan and to execute and deliver the Debt Instrument
        and the related Mortgage, and the Debt Instrument and the related
        Mortgage have been duly and properly executed by such parties;

                (x)     As of the applicable Cut-Off Date, the proceeds of the
        Home Loan have been fully disbursed and there is no requirement for
        future advances thereunder, and any and all applicable requirements set
        forth in the Home Loan documents have been complied with; the Obligor is
        not entitled to any refund of any amounts paid or due under the Debt
        Instrument or the related Mortgage;

                (xi)    Immediately prior to the sale, transfer and assignment
        to the Depositor, Mego will have good and indefeasible legal title to
        the Home Loan, the related Debt Instrument and the related Mortgage and
        the full right to transfer such Home Loan, the related Debt Instrument
        and the related Mortgage, and Mego will have been the sole owner
        thereof, subject to no liens, pledges, charges, mortgages, encumbrances
        or rights of others, except for such liens as will be released
        simultaneously with the transfer and assignment of the Home Loans to the
        Depositor (and the Home Loan File will contain no evidence inconsistent
        with the foregoing); and immediately upon the sale, transfer and
        assignment contemplated by the Home Loan Purchase Agreement, the
        Depositor will hold good title to, and be the sole owner of each Home
        Loan, the related Debt Instrument and the related Mortgage, free of all
        liens, pledges, charges, mortgages, encumbrances or rights of others;

                (xii)   Except for those Home Loans referred to in Section
        3.03(b)(ii) above that are delinquent as of the Closing Date, there is
        no default, breach, violation or event of acceleration existing under
        the Home Loan, the related Debt Instrument and the related Mortgage and
        there is no event which, with the passage of time or with notice and the
        expiration of any grace or cure period, would constitute a default,
        breach, violation or event of acceleration and neither Mego nor its
        predecessors have waived any default, breach, violation or event of
        acceleration;

                (xiii)  The Debt Instrument and the related Mortgage contain
        customary and enforceable provisions such as to render the rights and
        remedies of the holder thereof adequate for the realization against the
        Property of the benefits of the security provided thereby, including,
        (A) in the case of any Mortgage designated as a deed of trust, by
        trustee's sale, and (B) otherwise by judicial foreclosure;


                                       39


<PAGE>   44



                (xiv)   Each Home Loan is a fixed rate loan; the Debt Instrument
        shall mature within not more than 25 years, from the date of origination
        of the Home Loan; the Debt Instrument is payable in substantially equal
        Monthly Payments, with interest payable in arrears, and requires a
        Monthly Payment which is sufficient to fully amortize the original
        principal balance over the original term and to pay interest at the
        related Home Loan Interest Rate; interest on each Home Loan is
        calculated on the basis of a 360 day year consisting of twelve 30-day
        months, and the Debt Instrument does not provide for any extension of
        the original term;

                (xv)    The related Debt Instrument is not and has not been
        secured by any collateral except the lien of the corresponding Mortgage;

                (xvi)   With respect to any Mortgage Loan, if the related
        Mortgage constitutes a deed of trust, a trustee, duly qualified under
        applicable law to serve as such, has been properly designated and
        currently so serves and is named in the Mortgage, or a valid
        substitution of trustee has been recorded, and no extraordinary fees or
        expenses are or will become payable to the trustee under the deed of
        trust, except in connection with default proceedings and a trustee's
        sale after default by the Obligor;

                (xvii)  Mego has no knowledge of any circumstances or conditions
        not reflected in the representations set forth herein, or in the Home
        Loan Schedule, or in the related Home Loan File with respect to the
        related Mortgage, the related Property or the Obligor which could
        reasonably be expected to materially and adversely affect the value of
        the related Property, or the marketability of the Mortgage Loan or to
        cause the Mortgage Loan to become delinquent or otherwise in default;

                (xviii) Assuming no material change to the applicable law or
        regulations in effect as of the Closing Date, after the consummation of
        the transactions contemplated by this Agreement, the Master Servicer on
        behalf of the Trust and the Indenture Trustee will have the ability to
        foreclose or otherwise realize upon a Property, if the Home Loan is a
        Mortgage Loan, or to enforce the provisions of the related Home Loan
        against the Obligor thereunder, if the foreclosure upon any such
        Property or enforcement of the provisions of the related Home Loan
        against the Obligor are undertaken as set forth in Section 4.12;

                (xix)   There exists a Home Loan File relating to each Home Loan
        and such Home Loan File contains all of the original or certified
        documentation listed in Section 2.05 for such Home Loan, subject to
        applicable grace periods set forth in Section 2.06(c). Each Indenture
        Trustee's Home Loan File has been delivered to the Indenture Trustee and
        each Servicer's Home Loan File is being held in trust by Mego for the
        benefit of, and as agent for, the Indenture Trustee, the Securityholders
        and the Owner Trustee as the owner thereof. Each document included in
        the Home Loan File which is required to be executed by the Obligor has
        been executed by the Obligor in the appropriate places. With respect to
        each Mortgage Loan, the related Assignment of Mortgage to the Indenture


                                       40


<PAGE>   45



        Trustee is in recordable form and is acceptable for recording under the
        laws of the jurisdiction in which the Property is located. All blanks on
        any form required to be completed have been so completed;

                (xx)    Each Property is improved by a residential dwelling and
        is not a Home Loan in respect of a manufactured home or mobile home or
        the land on which a manufactured home or mobile home has been placed;

                (xxi)   Each Mortgage Loan was originated by Mego in accordance
        with Mego's "Express 35/Swift 60 Loan Program", "Debt Consolidation 125
        Loan Program", "Renovator 125 Loan Program" and "Zero Equity Loan
        Program" underwriting guidelines, as applicable, attached hereto as
        Exhibit D;

                (xxii)  If the Property securing any Mortgage Loan is in an area
        identified by the Federal Emergency Management Agency ("FEMA") as having
        special flood hazards, unless the community in which the area is
        situated is participating in the National Flood Insurance Program and
        the regulations thereunder or less than a year has passed since FEMA
        notification regarding such hazards, a flood insurance policy is in
        effect with respect to such Property with a generally acceptable carrier
        which complies with Section 102(a) of the Flood Disaster Protection Act
        of 1973; all improvements upon each Property are insured by a generally
        acceptable insurer against loss by fire hazards of extended coverage and
        such other hazards as are customary in the area where the Property is
        located pursuant to insurance policies conforming to the requirements of
        the Agreement; all such policies contain a standard mortgage clause
        naming Mego, its successors and assigns, as loss payee;

                (xxiii) All costs, fees and expenses incurred in originating and
        closing the Home Loan and in recording the related Mortgage were paid
        and the Obligor is not entitled to any refund of any amounts, paid or
        due to the Obligee pursuant to the Debt Instrument or any related
        Mortgage;

                (xxiv)  There is no obligation on the part of Mego or any other
        party other than the Obligor to make payments with respect to the Home
        Loan;

                (xxv)   At the time of origination of the Home Loan, each
        related prior lien, if any, was not 30 or more days delinquent;

                (xxvi)  With respect to each Mortgage Loan, the related Mortgage
        contains an enforceable provision requiring the consent of the Mortgagee
        to assumption of the related Mortgage Loan upon sale of the Property;

                (xxvii) With respect to any Mortgage Loan, there is no homestead
        or other exemption available to the Mortgagor which would materially
        interfere with the right to


                                       41


<PAGE>   46



        sell the related Property at a trustee's sale or the right to foreclose
        the Mortgage; no relief has been requested or allowed to the Mortgagor
        under the Civil Relief Act;

                (xxviii) The related Home Loan File for each Home Loan contains
        a title document with respect to such Home Loan reflecting that title to
        the related Property is vested at least 50% in the Obligor under such
        Home Loan;

                (xxix)  Each Property (including each residential dwelling
        improvement thereon) is free of damage which materially and adversely
        affects the value thereof;

                (xxx)   Each Home Loan was originated in compliance with all
        applicable laws and, to the best of Mego's knowledge, no fraud or
        misrepresentation was committed by any Person in connection therewith;

                (xxxi)  Each Home Loan has been serviced in accordance with all
        applicable laws and, to the best of Mego's knowledge, no fraud or
        misrepresentation was committed by any Person in connection therewith;

                (xxxii) The transfer, assignment and conveyance of the Debt
        Instruments and the Mortgages by Mego to the Depositor were not subject
        to the bulk transfer laws or any similar statutory provisions in effect
        in any applicable jurisdiction;

                (xxxiii) Any Home Loan originated in the State of Texas, was
        originated pursuant to either Chapter 3 or Chapter 6 of the Texas
        Consumer Credit Code;

                (xxxiv) As of the applicable Cut-Off Date, no Obligor is a
        debtor under proceedings under the Bankruptcy Code, and no such Obligor
        has defaulted in payments on a Home Loan after the filing of such
        bankruptcy case, whether under a plan or reorganization or otherwise;

                (xxxv)  Mego has not advanced funds, or induced, solicited or
        knowingly received any advance of loan payments from a party other than,
        with respect to a Mortgage Loan, the owner of the Property subject to
        the Mortgage;

                (xxxvi) Mego originated the Home Loans through its network of
        dealers and correspondents;

                (xxxvii) Each Home Loan conforms, and all such Home Loans in the
        aggregate conform, to the description thereof set forth in the
        Prospectus Supplement;

                (xxxviii) Each Home Loan either complies with the Home Ownership
        and Equity Protection Act of 1994 or is not subject to such act;


                                       42


<PAGE>   47



                (xxxix) Mego has caused to be performed or shall cause to be
        performed within 15 Business Days of the Closing Date any and all acts
        required to preserve the rights and remedies of the Trust and the
        Indenture Trustee in any insurance policies applicable to each Home
        Loan, including, without limitation, any necessary notifications of
        insurers, assignments of policies or interests therein, and
        establishment of coinsured, joint loss payee and mortgagee rights in
        favor of the Indenture Trustee;

                (xl)    To Mego's best knowledge, there exists no violation of
        any environmental law (either local, state or federal), rule or
        regulation in respect of the Property which violation has or could have
        a material adverse effect on the market value of such Property. Mego has
        no knowledge of any pending action or proceeding directly involving the
        related Property in which compliance with any environmental law, rule or
        regulation is in issue; and, to Mego's best knowledge, nothing further
        remains to be done to satisfy in full all requirements of each such law,
        rule or regulation constituting a prerequisite to the use and enjoyment
        of such Property;

                (xli)   None of the Mortgage Loans is secured by Mortgages on
        non-owner occupied Mortgaged Properties;

                (xlii)  On the Closing Date, 55% or more (by aggregate Principal
        Balance) of the Home Loans do not constitute "real estate mortgages" for
        the purpose of Treasury Regulation Section301.7701 under the Code. For
        this purpose a Home Loan does not constitute a "real estate mortgage"
        if:

                (i)     The Home Loan is not secured by an interest in real
        property, or

                (ii)    The Home Loan is not an "obligation principally secured
        by an interest in real property." For this purpose an "obligation is
        principally secured by an interest in real property" if it satisfies
        either test set out in paragraph (1) or paragraph (2) below.

                (1)     The 80-percent test. An obligation is principally
                        secured by an interest in real property if the fair
                        market value of the interest in real property securing
                        the obligation

                        (A)     was at least equal to 80 percent of the adjusted
                                issue price of the obligation at the time the
                                obligation was originated (or, if later, the
                                time the obligation was significantly modified);
                                or

                        (B)     is at least equal to 80 percent of the adjusted
                                issue price of the obligation on the Closing
                                Date.

                        For purposes of this paragraph (1), the fair market
                        value of the real property interest must be first
                        reduced by the amount of any lien on the real property
                        interest that is senior to the obligation being tested,
                        and must


                                       43


<PAGE>   48



                        be further reduced by a proportionate amount of any lien
                        that is in parity with the obligation being tested, in
                        each case before the percentages set forth in (1)(A) and
                        (1)(B) are determined. The adjusted issue price of an
                        obligation is its issue price plus the amount of accrued
                        original issue discount, if any, as of the date of
                        determination.

                (2)     Alternative test. An obligation is principally secured
                        by an interest in real property if substantially all of
                        the proceeds of the obligation were used to acquire or
                        to improve or protect an interest in real property that,
                        at the origination date, is the only security for the
                        obligation. For purposes of this test, loan guarantees
                        made by the United States or any state (or any political
                        subdivision, agency, or instrumentality of the United
                        States or of any state), or other third party credit
                        enhancement are not viewed as additional security for a
                        loan. An obligation is not considered to be secured by
                        property other than real property solely because the
                        obligor is personally liable on the obligation. For this
                        purpose only, substantially all of the proceeds of the
                        obligations means 662/3% or more of the gross proceeds.

                (xliii) With respect to each Home Loan that is not a first
        mortgage loan, either (i) no consent for the Home Loan is required by
        the holder of the related prior lien or (ii) such consent has been
        obtained and has been delivered to the Indenture Trustee;

                (xliv)  No Home Loan was selected from Mego's assets in a manner
        which would cause it to be adversely selected as to credit risk from the
        pool of home loans owned by Mego.

        Section 3.04 [Reserved].

        Section 3.05 Purchase and Substitution.

        (a)     It is understood and agreed that the representations and
warranties set forth in Sections 3.03 shall survive the conveyance of the Home
Loans to the Issuer, the Grant of the Home Loans to the Indenture Trustee and
the delivery of the Securities to the Securityholders and shall be continuing as
long as any Security is outstanding. Upon discovery by the Depositor, the Master
Servicer, the Seller, the Owner Trustee, the Indenture Trustee or any
Securityholder of a breach of any of such representations and warranties made
pursuant to Section 3.03(b), the party discovering such breach shall give prompt
written notice to the others. In the event of a determination in Section 2.06(c)
or a breach of a representation and warranty made pursuant to Section 3.03(b)
that materially and adversely affects the value of the Home Loans or the
interest of the Securityholders, or which materially and adversely affects the
interests of the Securityholders in the related Home Loan in the case of a
representation and warranty relating to a particular Home Loan (notwithstanding
that such representation and warranty was made to


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<PAGE>   49



the Seller's best knowledge), and a failure within sixty Business Days of
discovery or receipt of notice of such failure to effect a cure of the
circumstances giving rise to such defect, Mego shall be obligated, on the
Monthly Cut-Off Date next succeeding the expiration of such sixty-day period, to
repurchase (or substitute for, to the extent permitted by subsection (b) below)
the affected Home Loan. It is understood and agreed that the obligation of Mego
to repurchase or substitute any such Home Loan pursuant to this Section shall
constitute the sole remedy against it with respect to such breach of the
foregoing representations or warranties or the existence of the foregoing
conditions. With respect to representations and warranties made by Mego pursuant
to Section 3.03(b) that are made to Mego's best knowledge, if it is discovered
by any of the Depositor, the Master Servicer, the Seller, Mego, the Indenture
Trustee, the Owner Trustee, or any Securityholder that the substance of such
representation and warranty is inaccurate and such inaccuracy materially and
adversely affects the value of the related Home Loan, notwithstanding Mego's
lack of knowledge, such inaccuracy shall be deemed a breach of the applicable
representation and warranty.

        If Mego is required to repurchase any Home Loan on a Monthly Cut-Off
Date that is not a Business Day, such repurchase shall be made on the last
Business Day preceding such Monthly Cut-Off Date. Any Home Loan required to be
purchased or repurchased pursuant to this Section 3.05(a) is referred to as a
"Defective Home Loan".

        (b)     Mego shall be obligated to repurchase a Defective Home Loan for
the Purchase Price, payable to the Indenture Trustee in cash on the Monthly
Cut-Off Date specified in Section 3.05(a) above, for deposit in the Note
Distribution Account. Notwithstanding the foregoing, Mego may elect in lieu of
the repurchase of a Defective Home Loan as provided in this Section 3.05, to
substitute, as of the Monthly Cut-off Date specified in Section 3.05(a), a
Qualified Substitute Home Loan for the Defective Home Loan in accordance with
the provisions of this Section 3.05.

        (c)     Mego shall notify the Master Servicer, and the Indenture Trustee
in writing not less than five Business Days before the related Determination
Date which is on or before the date on which Mego would otherwise be required to
repurchase such Home Loan pursuant to Section 3.05(a) of its intention to effect
a substitution under this Section. On such Determination Date (the "Substitution
Date"), Mego shall deliver to the Indenture Trustee a list of the Home Loans to
be substituted for by such Qualified Substitute Home Loans, and attaching as an
exhibit a supplemental Home Loan Schedule (the "Supplemental Loan Schedule")
setting forth the same type of information appearing on the Home Loan Schedule
and representing as to the accuracy thereof. In connection with any substitution
pursuant to this Section 3.05, to the extent that the aggregate Principal
Balance of any Qualified Substitute Home Loan or Home Loans is less than the
aggregate Principal Balance of the corresponding Home Loan or Home Loans as of
the end of the Due Period prior to the Determination Date on which the
substitution is being made, Mego shall deposit such difference (a "Substitution
Adjustment Amount") to the Note Distribution Account on such date.


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<PAGE>   50



        (d)     Concurrently with the satisfaction of the conditions set forth
in this Section 3.05 and the Grant of such Qualified Substitute Home Loans to
the Indenture Trustee pursuant to the Indenture, Exhibit A to this Agreement
shall be deemed to be amended to exclude all Home Loans being replaced by such
Qualified Substitute Home Loans and to include the information set forth on the
Supplemental Loan Schedule with respect to such Qualified Substitute Home Loans,
and all references in this Agreement to Home Loans shall include such Qualified
Substitute Home Loans and be deemed to be made on or after the related
Substitution Date, as the case may be, as to such Qualified Substitute Home
Loans.

        (e)     With respect to all Defective Home Loans or other Home Loans
repurchased by Mego pursuant to this Agreement, upon the deposit of the Purchase
Price therefor to the Note Distribution Account, the Indenture Trustee shall
assign to Mego, without recourse, representation or warranty, all the Indenture
Trustee's right, title and interest in and to such Defective Home Loans or Home
Loans, which right, title and interest were conveyed to the Indenture Trustee
pursuant to Section 2.01. The Indenture Trustee shall take any actions as shall
be reasonably requested by Mego to effect the repurchase of any such Home Loans.

        (f)     The Servicer may, at its option, purchase from the Trust any
Defaulted Home Loan or substitute a Qualified Substitute Home Loan for any
Defaulted Home Loan, provided, however, that the aggregate of Principal Balances
of Defaulted Home Loans purchased or replaced pursuant to this Section 3.05(f)
shall not exceed 10% of the Original Pool Principal Balance. If the Servicer
elects to purchase a Defaulted Home Loan, the Servicer shall deposit the
Purchase Price in the Note Distribution Account on the Monthly Cut-Off Date
following the date on which such election is made. Any substitution of a
Defaulted Home Loan for a Qualified Substitute Home Loan by the Servicer shall
be performed in accordance with the substitution provisions set forth in Section
3.05(c) and Section 3.05(d).


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<PAGE>   51



                                   ARTICLE IV.

                   ADMINISTRATION AND SERVICING OF HOME LOANS

        Section 4.01 Servicing Standard.

        (a)     The Master Servicer is hereby authorized to act as agent for the
Trust and in such capacity shall manage, service, administer and make
collections on the Home Loans, and perform the other actions required by the
Master Servicer under this Agreement. In performing its obligations hereunder
the Master Servicer shall at all times act in good faith in a commercially
reasonable manner and in accordance with applicable law and the Debt Instruments
and Mortgages. The Master Servicer shall have full power and authority, acting
alone and/or through the Servicer as provided in Section 4.02, subject only to
this Agreement and the respective Home Loans, to do any and all things in
connection with such servicing and administration which are consistent with the
ordinary practices of prudent mortgage lending institutions, but without regard
to:

                (i)     any relationship that the Master Servicer, the Servicer
        or any affiliate of the Master Servicer or any Servicer may have with
        the related Obligor:

                (ii)    Mego's obligations to repurchase or substitute for a
        Defective Home Loan pursuant to Section 3.05;

                (iii)   the ownership of any Securities by the Master Servicer
        or any affiliate of the Master Servicer;

                (iv)    the Master Servicer's obligation to make Interest
        Advances pursuant to Section 4.08(a) or to make Foreclosure Advances
        pursuant to Section 4.08(b); or

                (v)     the Master Servicer's right to receive compensation for
        its services as provided in Section 5.01(c)(i)(a).

        The Master Servicer may take any action hereunder, including exercising
any remedy under any Home Loan, retaining counsel in connection with the
performance of any of its obligations hereunder and instigating litigation to
enforce any obligation of any Obligor, without the consent or approval of the
Indenture Trustee, unless any such consent or approval is expressly required
hereunder or under applicable law.

        (b)     The Indenture Trustee shall execute and return to the Master
Servicer or the Servicer designated in a written instruction from the Master
Servicer to the Indenture Trustee, within 5 days of the Indenture Trustee's
receipt any and all documents or instruments necessary to maintain the lien
created by any Mortgage on the related Property or any portion thereof, and,
within 5 days of request by the Master Servicer or the Servicer therefor a power
of attorney in


                                       47


<PAGE>   52



favor of the Master Servicer or Servicer with respect to any modification,
waiver, or amendment to any document contained in any Home Loan File and any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge, and all other comparable instruments, with respect to the Home
Loans and with respect to the related Mortgaged Properties prepared and
delivered to the Indenture Trustee by the Master Servicer or any Servicer, all
in accordance with the terms of this Agreement.

        (c)     The Indenture Trustee shall furnish the Master Servicer or
Servicer within 5 days of request of a Master Servicing Officer therefor any
powers of attorney and other documents necessary and appropriate to carry out
its servicing and administrative duties hereunder, including any documents or
powers of attorney necessary to foreclose any Home Loan. The forms of any such
powers or documents shall be appended to such requests.

        Section 4.02 Servicing Arrangements.

        (a)     On or prior to the date hereof, the Master Servicer has entered
into a Servicing Agreement with respect to all of the Home Loans, in
substantially the form of the Form of the Servicing Agreement attached hereto as
Exhibit E with Mego, as Servicer. Upon the termination of the Servicing
Agreement, the Master Servicer may only appoint or consent to the appointment or
succession of a successor Servicer under the Servicing Agreement and may only
enter into a substitute servicing agreement which is in form and substance as
the Servicing Agreement attached hereto as Exhibit E and with a Person
acceptable to the Indenture Trustee. The Master Servicer shall not consent to
any material amendment, modification or waiver of the provisions of a Servicing
Agreement without the consent of the Indenture Trustee.

        (b)     No provision of this Agreement or the Servicing Agreement shall
be deemed to relieve the Master Servicer of any of its duties and obligations to
the Indenture Trustee on behalf of Securityholders with respect to the servicing
and administration of the Home Loans as provided hereunder; it being understood
that the Master Servicer shall be obligated with respect thereto to the same
extent and under the same terms and conditions as if it alone were performing
all duties and obligations set forth in this Agreement in connection with the
collection, servicing and administration of such Home Loans.

        (c)     Without limitation of the provisions of Section 4.02(b), the
Master Servicer shall (i) review the servicing reports prepared by the Servicer
in order to ensure the accuracy thereof, (ii) otherwise monitor the performance
by the Servicer under the Servicing Agreement and notify the Indenture Trustee
of any Servicer Termination Event, and (iii) be obligated to ensure that the
Servicer deposits Payments into the Collection Account. In the event the
Servicer fails to make such deposit, the Master Servicer will deposit such
amounts as set forth in Section 5.01(a)(1).

        (d)     The Master Servicer agrees that it shall at all times be
prepared to perform the obligations of the Servicer if the Servicer fails to
perform its duties and obligations under the Servicing Agreement.


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<PAGE>   53



        (e)     The Servicing Agreement may provide that the Servicer may
retain, as additional compensation, prepayment penalties, assumption and
processing fees paid by any Obligor and all similar fees customarily associated
with the servicing of the Home Loans, including, but not limited to late
charges, paid by any Obligor.

        (f)     Mego, as Servicer, shall provide information to the Master
Servicer monthly in a mutually agreeable format in order to enable the Master
Servicer to independently reconfirm the loan-by-loan reconciliation of the
outstanding Principal Balance of each Home Loan included in such information.
The Master Servicer shall prepare exception reports, if necessary, showing all
Principal Balance differences between the information provided by the Servicer
and the confirmations prepared by the Master Servicer and shall furnish such
reports to the Indenture Trustee.

        Section 4.03 Servicing Record.

        (a)     The Master Servicer shall establish and maintain books and
records for the Home Loans (the "Servicing Record"), in which the Master
Servicer shall record: (i) all Payments received or collected by or on behalf of
the Master Servicer (through the Servicer or otherwise) or received by the
Indenture Trustee in respect of each Home Loan and each Foreclosed Property and
(ii) all amounts owing to the Master Servicer in compensation for services
rendered by the Master Servicer hereunder or in reimbursement of costs and
expenses incurred by the Master Servicer hereunder.

        (b)     Except as otherwise provided herein, amounts received or
collected by or on behalf of the Master Servicer or the Indenture Trustee from
or on behalf of any Obligor or in respect of any Foreclosed Property shall be
credited to the Servicing Record:

                (i)     promptly following direct receipt or direct collection
        by the Master Servicer;

                (ii)    in the case of a Home Loan directly serviced by a
        Servicer, promptly following deposit of the receipt or collection in the
        related Collection Account; or

                (iii)   in the case of any amount received directly by the
        Indenture Trustee, promptly following the Master Servicer's actual
        knowledge of receipt by the Indenture Trustee;

but in any event not later than the Determination Date next following the date
of receipt or collection by or on behalf of the Master Servicer (through the
Servicer or otherwise) or receipt by the Indenture Trustee. Amounts received or
collected by the Master Servicer in connection with the purchase or repurchase
of any Home Loan or any Foreclosed Property shall be so recorded on and as of
the date of receipt. The Servicing Record shall separately reflect amounts so
received or collected by the Master Servicer in each Due Period.


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<PAGE>   54




        (c)     The Master Servicer shall credit to the Servicing Record
relating to each Determination Date, on a Home Loan-by-Home Loan basis, each of
the following Payments collected or received by or on behalf of the Master
Servicer (through the Servicer or otherwise) or received by the Indenture
Trustee in respect of each Home Loan and each Foreclosed Property:

                (i)     all payments on account of principal;

                (ii)    all payments on account of interest;

                (iii)   all proceeds of the purchase or repurchase of any Home
        Loan pursuant to Section 3.05 and all Substitution Adjustment Amounts;

                (iv)    all amounts paid by or on behalf of the related Obligor
        in respect of Foreclosure Advances previously advanced by the Master
        Servicer or the Servicer;

                (v)     all revenues received or collected in respect of any
        Foreclosed Property, including all proceeds of the sale of any
        Foreclosed Property pursuant to Section 4.13;

                (vi)    all proceeds of the sale of the Home Loans and any
        Foreclosed Properties pursuant to Section 11.01; and

                (vii)   all Insurance Proceeds, any condemnation awards or
        settlements or any payments made by any related guarantor or third-party
        credit-support provider and any and all other amounts received in
        respect of Home Loans and not specified above.

        (d)     Notwithstanding anything to the contrary herein, the Master
Servicer shall not be required to credit to the Servicing Record, and neither
the Master Servicer nor any Securityholder shall have any right or interest in
any amount due or received with respect to any Home Loan or any related
Foreclosed Property subsequent to the date of purchase of such Home Loan or
Foreclosed Property from the Trust.

        (e)     The Master Servicer shall separately record in the Servicing
Record the items required to be included in the Master Servicer Certificate and
additionally the following items to the extent not included therein:

                (i)     on or before each Determination Date, the related unpaid
        Master Servicer Fee due the Master Servicer on the next Distribution
        Date;

                (ii)    on or before each Determination Date, all amounts
        retained by the Servicer in respect of the preceding Due Period in
        respect of amounts due Independent Contractors hired by the Master
        Servicer to operate and manage a Foreclosed Property pursuant to Section
        4.14(b);


                                       50


<PAGE>   55



                (iii)   on or before each Determination Date, the amount of
        unreimbursed Interest Advances in respect of prior Distribution Dates
        and the amount which the Master Servicer or the Servicer is entitled to
        be reimbursed therefor in accordance with Section 4.08;

                (iv)    on or before each Determination Date, all amounts due as
        of the preceding Monthly Cut-Off Date in reimbursement of Foreclosure
        Advances previously advanced by the Master Servicer or the Servicer
        (separately identifying the type and amount of each then due);

                (v)     on or before each Determination Date and based on
        information provided to the Master Servicer by the Indenture Trustee,
        all Other Fees distributable pursuant to Section 5.01(c)(iii)(d) on the
        next succeeding Distribution Date;

                (vi)    promptly following each Distribution Date, the aggregate
        amount of the Master Servicer Fee, Servicer Fee and the Indenture
        Trustee Fee paid to the Master Servicer, Servicer and Indenture Trustee
        respectively, on such Distribution Date pursuant to Section
        5.01(c)(i)(a) and the aggregate amount of the Owner Trustee Fee Reserve
        paid to the Servicer, on such Distribution Date pursuant to Section
        5.01(c)(i)(c);

                (vii)   promptly following each Distribution Date, the aggregate
        amount of Interest Advances and Foreclosure Advances reimbursed to the
        Master Servicer or the Servicer on such Distribution Date;

                (viii)  on or before each Determination Date, the Principal
        Balance of Home Loans that became Defaulted Home Loans during the prior
        Due Period;

                (ix)    on or before each Determination Date, identification by
        loan number, Obligor name, address of Property and Principal Balance of
        such Home Loan with respect to which the Master Servicer has requested
        that the Indenture Trustee obtain the environmental report required by
        Section 4.12 in connection with deciding pursuant to Section 4.12 to
        foreclose on or otherwise acquire title to the related Property;

                (x)     on or before each Determination Date, the Principal
        Balance of each such Home Loan with respect to which the Master Servicer
        has determined under the circumstances described in Section 4.12(a) in
        good faith in accordance with customary mortgage loan servicing
        practices that all amounts which it expects to receive with respect to
        such Home Loan have been received; and

                (xi)    on or before each Determination Date, any other
        information with respect to the Home Loans reasonably required by the
        Indenture Trustee to determine the amount required to be distributed
        pursuant to Section 5.01(c) and determinable by the Master Servicer
        without undue burden from the Servicer or the items otherwise required
        to be maintained in each Servicing Record.


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<PAGE>   56




        Section 4.04 Annual Statement as to Compliance; Notice of Event of
Default.

        (a)     The Master Servicer will deliver to the Indenture Trustee and
the Depositor on or before May 31 of each year, beginning in 1998 an Officer's
Certificate signed by two Responsible Officers of the Master Servicer stating
with respect to the Trust, that:

                (i)     a review of the activities of the Master Servicer during
        the preceding calendar year (or in connection with the first such
        Officer's Certificate the period from the Closing Date through the end
        of 1997) and of the Master Servicer's performance under this Agreement
        with respect to such Trust has been made under the supervision of the
        signer of such Officer's Certificate; and

                (ii)    to the best of such signer's knowledge, based on such
        review, the Master Servicer has fulfilled all its obligations under this
        Agreement throughout such year (or such portion of such year), or there
        has been a default in the fulfillment of any such obligation, in which
        case such Officer's Certificate shall specify each such default known to
        such signer and the nature and status thereof and what action the Master
        Servicer proposes to take with respect thereto.

        (b)     The Master Servicer shall deliver to the Indenture Trustee and
the Depositor, promptly after having obtained knowledge thereof, but in no event
later than 2 Business Days thereafter, written notice in an Officer's
Certificate of any event which with the giving of notice or lapse of time, or
both, would become an Event of Default under Section 10.01. Each of Mego, the
Depositor, the Indenture Trustee, the Owner Trustee and the Master Servicer
shall deliver to the other of such Persons promptly after having obtained
knowledge thereof, but in no event later than 2 Business Days thereafter,
written notice in an Officer's Certificate of any event which with the giving of
notice or lapse of time, or both, would become an Event of Default under Section
10.01.

        Section 4.05 Annual Independent Accountants' Report; Servicer Review
Report.

        (a)     The Master Servicer shall cause a firm of Independent
Accountants, who may also render other services to the Master Servicer, to
deliver to the Indenture Trustee, Owner Trustee and the Depositor on or before
May 31 (or 150 days after the end of the Master Servicer's fiscal year) of each
year, beginning on the first May 31 (or other applicable date) after the date
that is six months after the Closing Date, with respect to the twelve months
ended the immediately preceding December 31 (or other applicable date) (or such
other period as shall have elapsed from the Closing Date to the date of such
certificate) a report, conducted in accordance with generally accepted
accounting principles (the "Accountant's Report") including: (i) an opinion on
the financial position of the Master Servicer at the end of its most recent
fiscal year, and the results of operations and changes in financial position of
the Master Servicer for such year then ended on the basis of an examination
conducted in accordance with generally accepted auditing standards, and (ii) a
statement to the effect that, based on an examination of certain specified
documents and records relating to the servicing of the Master Servicer's
mortgage loan portfolio


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<PAGE>   57



or the affiliate of the Master Servicer principally engaged in the servicing of
mortgage loans conducted in compliance with the audit program for mortgages
serviced for FNMA, the United States Department of Housing and Urban Development
Mortgagee Audit Standards or the Uniform Single Attestation Program for Mortgage
Bankers (the "Applicable Accounting Standards") such firm is of the opinion that
such servicing has been conducted in compliance with the Applicable Accounting
Standards except for such exceptions as such firm shall believe to be immaterial
and such other exceptions as shall be set forth in such statement.

        (b) In addition, the Master Servicer will provide a report of a firm of
Independent Accountants which shall state that (1) a review in accordance with
agreed upon procedures was made of such number of Master Servicer Certificates
which the Independent Accountants deem necessary to carry out their review of
Master Servicer performance, but in no case less than two and (2) except as
disclosed in the Accountant's Report, no exceptions or errors in the Master
Servicer Certificates so examined were found. The Accountant's Report shall also
indicate that the firm is independent of the Master Servicer within the meaning
of the Code of Professional Ethics of the American Institute of Certified Public
Accountants.

        (c) The Master Servicer shall mail a copy of the Servicer Review
Report and any report or statement of the Servicer prepared pursuant to Section
6.04 of the Servicing Agreement to the Indenture Trustee.

        (d) (1) The Master Servicer shall cause a firm of Independent
Accountants to review, annually within 90 days after each anniversary of the
Closing Date, in accordance with agreed upon procedures the performance of the
Servicer under the Servicing Agreement in order to confirm that the records of
the Servicer accurately reflect collections, delinquencies and other relevant
data with respect to the Home Loans reported to the Master Servicer for the
purpose of preparation of the Servicing Record, and that such data is accurately
reported to the Master Servicer for reflection in the Servicing Record. Any
exceptions or errors disclosed by such procedures shall be included in a report
delivered to the Master Servicer, the Indenture Trustee, Owner Trustee and the
Depositor (the "Servicer Review Report").

        Section 4.06 Access to Certain Documentation and Information Regarding
Home Loans.

        The Master Servicer shall provide to representatives of the Indenture
Trustee reasonable access to (a) the documentation regarding the Home Loans and
to those employees of the Master Servicer who are responsible for the
performance of the Master Servicer's duties hereunder and (b) the books of
account, records, reports and other papers of the Master Servicer and to discuss
its affairs, finances and accounts with its employees and Independent
accountants for the purpose of reviewing or evaluating the financial condition
of the Master Servicer. The Master Servicer shall provide such access to any
Securityholder only in such cases where the Master Servicer is required by
applicable statutes or regulations (whether applicable to the Master Servicer or
to such Securityholder) to permit such Securityholder to review such
documentation. In each case, such access shall be afforded without charge but
only upon reasonable request and during normal business hours. Nothing in this
Section shall derogate from the obligation of the Master Servicer


                                       53


<PAGE>   58



to observe any applicable law prohibiting disclosure of information regarding
the Obligors, and the failure of the Master Servicer to provide access as
provided in this Section as a result of such obligation shall not constitute a
breach of this Section. Any Securityholder, by its acceptance of a Security (or
by acquisition of its beneficial interest therein), shall be deemed to have
agreed to keep confidential and not to use for its own benefit any information
obtained by it pursuant to this Section, except as may be required by applicable
law or by any applicable regulatory authority.

        Section 4.07         [Reserved]

        Section 4.08         Advances.

        (a)     With respect to the Home Loans (other than Defaulted Home Loans)
and each Distribution Date, the Master Servicer shall advance from its own funds
and deposit into the Note Distribution Account or from funds on deposit in the
related Collection Account in respect of amounts available for distribution on
future Distribution Dates, no later than the related Determination Date, the
excess, if any, of (i) the aggregate of the portions of the Monthly Payments due
with respect to all Home Loans in the related Due Period allocable to interest
(calculated at a rate equal to the Net Loan Rate) over (ii) the aggregate amount
to be deposited into the Note Distribution Account with respect to all Home
Loans and such Distribution Date and allocated in accordance with Section
4.03(c) to interest (such amounts, "Interest Advances"). Any funds so applied
from funds on deposit in the Collection Account in respect of amounts available
for distribution on future Distribution Dates shall be reimbursed by the Master
Servicer on or before any future Distribution Date to the extent that funds on
deposit in the Note Distribution Account applied in the order of priority set
forth in such Section 5.01(c) would be less than the amount required to be
distributed pursuant to Section 5.01(c) on such dates as a result of such
Interest Advances.

        Notwithstanding anything herein to the contrary, no Interest Advance
shall be required to be made hereunder (i) if the Master Servicer determines
that such Interest Advance would, if made, constitute a Nonrecoverable Advance
or (ii) with respect to shortfalls in interest resulting from application of the
Soldiers' and Sailors' Relief Act or from full or partial prepayments of any
Loan.

        (b)     The Master Servicer shall advance from its own funds the
following amounts in respect of any Mortgage Loan or Foreclosed Property, as
applicable (collectively, "Foreclosure Advances"):

                (i)     all third party costs and expenses (including legal fees
        and costs and expenses relating to bankruptcy or insolvency proceedings
        in respect of any Obligor) associated with the institution of
        foreclosure or other similar proceedings in respect of any Home Loan
        pursuant to Section 4.12;


                                       54


<PAGE>   59



                (ii)    all insurance premiums due and payable in respect of
        each Foreclosed Property, prior to the date on which the related
        Insurance Policy would otherwise be terminated;

                (iii)   all real estate taxes and assessments in respect of each
        Foreclosed Property that have resulted in the imposition of a lien
        thereon, other than amounts that are due but not yet delinquent;

                (iv)    all costs and expenses necessary to maintain each
        Foreclosed Property;

                (v)     all fees and expenses payable to any Independent
        Contractor hired to operate and manage a Foreclosed Property pursuant to
        Section 4.14(b); and

                (vi)    all fees and expenses of any Independent appraiser or
        other real estate expert retained by the Indenture Trustee pursuant to
        Section 4.13(a).

The Master Servicer shall advance the Foreclosure Advances described in clauses
(i) through (v) above if, but only if, it has approved the foreclosure or other
similar proceeding in writing and the Master Servicer would make such an advance
if it or an affiliate held the affected Mortgage Loan or Foreclosed Property for
its own account and, in the Master Servicer's good faith judgment, such advance
would not constitute a nonrecoverable advance. In making such assessment with
respect to the institution of such proceedings, the Master Servicer shall not
advance funds with respect to a Mortgage Loan unless the appraised value of the
related Property exceeds the sum of (i) the amounts necessary to satisfy any
liens prior to the liens on Mortgages securing such Mortgage Loan and (ii) the
reasonably anticipated costs of foreclosure or similar proceedings.

        Section 4.09 Reimbursement of Interest Advances and Foreclosure
Advances.

        (a)     The Master Servicer shall be entitled to be reimbursed pursuant
to Section 5.01(c) for previously unreimbursed Interest Advances made from its
own funds or any such previously unreimbursed Interest Advance by the Servicer
with respect to a Home Loan on Distribution Dates subsequent to the Distribution
Date in respect of which such Interest Advance was made from Payments with
respect to such Home Loan. If an Interest Advance shall become a Nonrecoverable
Advance or if a Home Loan shall become a Defaulted Home Loan and the Master
Servicer or Servicer shall not have been fully reimbursed for any such Interest
Advances with respect to such Home Loan, the Master Servicer or Servicer, as
applicable, shall be entitled to be reimbursed for the outstanding amount of
such Interest Advances from unrelated Home Loans pursuant to Section
5.01(c)(i)(b). No interest shall be due to the Master Servicer in respect of any
Interest Advance for any period prior to the reimbursement thereof.

        (b)     The Master Servicer shall be entitled to be reimbursed pursuant
to Section 5.01(c)(i)(b) from related Payments for Foreclosure Advances advanced
on or prior to the related


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<PAGE>   60



Monthly Cut-Off Date but only to the extent the Master Servicer has satisfied
the requirements of Section 4.08. No interest shall be due to the Master
Servicer in respect of any Foreclosure Advance for any period prior to the
reimbursement thereof.

        (c)     The Indenture Trustee shall offset against amounts otherwise
distributable to the Master Servicer pursuant to Section 5.01(c), amounts, if
any, which were required to be deposited in any Collection Account pursuant to
Section 5.01(c) with respect to the related Due Period but which were not so
deposited.

        Section 4.10. Modifications, Waivers, Amendments and Consents.

        (a)     The Master Servicer shall not agree to any modification, waiver
or amendment of any provision of any Home Loan unless, in the Master Servicer's
good faith judgment, (i) such modification, waiver or amendment would minimize
the loss that might otherwise be experienced with respect to such Home Loan, and
(ii) such Home Loan has experienced a payment default or a payment default is
reasonably foreseeable by the Master Servicer. The Master Servicer may agree to
subordinate the position of the security interest in the Property which secures
any Mortgage Loan, provided such subordination (i) would permit the Obligor to
refinance a senior lien to take advantage of a lower interest rate or (ii) would
permit the Obligor to extend the term of the senior lien. Notwithstanding the
foregoing, no modification, waiver or amendment of a Home Loan shall involve the
execution by the Obligor of a new Debt Instrument or a new Mortgage.

        (b)     The Master Servicer shall notify the Indenture Trustee of any
modification, waiver or amendment of any provision of any Home Loan and the date
thereof, and shall deliver to the Indenture Trustee for deposit in the related
Home Loan File, an original counterpart of the agreement relating to such
modification, waiver or amendment, promptly following the execution thereof.
Such notice shall state that the conditions contained in this Section 4.10 have
been satisfied.

        Section 4.11. Due-On-Sale; Due-on-Encumbrance.

        (a)     If any Home Loan contains a provision, in the nature of a
"due-on-sale" clause, which by its terms:

                (i)     provides that such Home Loan shall (or may at the
        Obligee's option) become due and payable upon the sale or other transfer
        of an interest in the related Property; or

                (ii)    provides that such Home Loan may not be assumed without
        the consent of the related Obligee in connection with any such sale or
        other transfer,

then, for so long as such Home Loan is included in the Trust, the Master
Servicer, on behalf of the Indenture Trustee, shall exercise any right the Trust
or the Indenture Trustee may have as the


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Obligee of record with respect to such Home Loan (x) to accelerate the payments
thereon, or (y) to withhold its consent to any such sale or other transfer, in a
manner consistent with the servicing standard set forth in Section 4.01.

        (b)     If any Home Loan contains a provision, in the nature of a
"due-on-encumbrance" clause, which by its terms:

                (i)     provides that such Home Loan shall (or may at the
        Obligee's option) become due and payable upon the creation of any lien
        or other encumbrance on the related Property; or

                (ii)    requires the consent of the related Obligee to the
        creation of any such lien or other encumbrance on the related Property,

then, for so long as such Home Loan is included in the Trust, the Master
Servicer, on behalf of the Trust or the Indenture Trustee, shall exercise any
right the Indenture Trustee may have as the Obligee of record with respect to
such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its
consent to the creation of any such lien or other encumbrance, in a manner
consistent with the servicing standard set forth in Section 4.01.

        (c)     Nothing in this Section 4.11 shall constitute a waiver of the
Indenture Trustee's right to receive notice of any assumption of a Home Loan,
any sale or other transfer of the related Property or the creation of any lien
or other encumbrance with respect to such Property.

        (d)     Except as otherwise permitted by Section 4.10, the Master
Servicer shall not agree to modify, waive or amend any term of any Home Loan in
connection with the taking of, or the failure to take, any action pursuant to
this Section 4.11.

        Section 4.12. Collection Procedures; Foreclosure Procedures.

        (a)     If any Monthly Payment due under any Home Loan is not paid when
the same is due and payable, or if the Obligor fails to perform any other
covenant or obligation under such Home Loan and such failure continues beyond
any applicable grace period, the Master Servicer shall take such action as it
shall deem to be in the best interest of the Trust; including but not limited to
proceeding against the Property securing such Home Loan. In the event that the
Master Servicer determines not to proceed against the Property, on or before the
Determination Date following such determination the Master Servicer shall
determine in good faith in accordance with customary servicing practices that
all amounts which it expects to receive with respect to such Home Loan have been
received. If the Master Servicer makes such a determination, it shall be
reflected in the Servicing Record pursuant to Section 4.03(e)(xi).

        (b)     In accordance with the criteria for proceeding against the
Property set forth in Section 4.12(a), unless otherwise prohibited by applicable
law or court or administrative order, the Master Servicer, on behalf of the
Trust and the Indenture Trustee, may, at any time, institute


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foreclosure proceedings, exercise any power of sale to the extent permitted by
law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or
title to the related Property, by operation of law or otherwise. The Master
Servicer shall be permitted to institute foreclosure proceedings, repossess,
exercise any power of sale to the extent permitted by law, obtain a deed in lieu
of foreclosure, or otherwise acquire possession of or title to any Property, by
operation of law or otherwise only in the event that in the Master Servicer's
reasonable judgement such action is likely to result in a positive economic
benefit to the Trust by creating net liquidation proceeds (after reimbursement
of all amounts owed with respect to such Home Loan to the Master Servicer or the
Servicer) and provided that, with respect to any Property, prior to taking title
thereto, the Master Servicer has requested that the Indenture Trustee obtain,
and the Indenture Trustee shall have obtained, an environmental review to be
performed on such Property by a company with recognized expertise, the scope of
which is limited to the review of public records and documents for information
regarding whether such Property has on it, under it or is near, hazardous or
toxic material or waste. If such review reveals that such Property has on it,
under it or is near hazardous or toxic material or waste or reveals any other
environmental problem, the Indenture Trustee shall provide a copy of the related
report to the Master Servicer and title shall be taken to such Property only
after obtaining the written consent of the Indenture Trustee.

        In connection with any foreclosure proceeding on a Mortgage Loan, the
Master Servicer shall follow such practices and procedures in a manner which is
consistent with the Master Servicer's procedure for foreclosure with respect to
similar loans held in the Master Servicer's portfolio for its own account or, if
there are no such loans, such loans serviced by the Master Servicer for others,
giving due consideration to accepted servicing practices of prudent lending
institutions. To the extent required by Section 4.08, the Master Servicer shall
advance all necessary and proper Foreclosure Advances until final disposition of
the Foreclosed Property and shall manage such Foreclosed Property pursuant to
Section 4.14. If, in following such foreclosure procedures, title to the
Foreclosed Property is acquired, the deed or certificate of sale shall be issued
to the Co-Owner Trustee and the Indenture Trustee.

        Section 4.13. Sale of Foreclosed Properties.

        (a)     The Master Servicer may offer to sell to any Person any
Foreclosed Property, if and when the Master Servicer determines consistent with
the Servicing Standard and that such a sale would be in the best interests of
the Trust. The Master Servicer shall give the Indenture Trustee not less than
five days' prior notice of its intention to sell any Foreclosed Property, and
shall accept the highest bid received from any Person for any Foreclosed
Property in an amount at least equal to the sum of:

                (i)     the Principal Balance of the related foreclosed Home
        Loan, unreimbursed Foreclosure Advances plus the outstanding amount of
        any liens superior in priority, if any, to the lien of the foreclosed
        Home Loan; and


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<PAGE>   63



                (ii)    all unpaid interest accrued thereon at the related Home
        Loan Interest Rate through the date of sale.

In the absence of any such bid, the Master Servicer shall accept the highest bid
received from any Person that is determined to be a fair price for such
Foreclosed Property by the Master Servicer, if the highest bidder is a Person
that is Independent, or by an Independent appraiser retained by the Master
Servicer, if the highest bidder is a Person that is not Independent. In the
absence of any bid determined to be fair as aforesaid, the Master Servicer shall
offer the affected Foreclosed Property for sale to any Person, other than an
Interested Person, in a commercially reasonable manner for a period of not less
than 10 or more than 30 days, and shall accept the highest cash bid received
therefor in excess of the highest bid previously submitted. If no such bid is
received, any Interested Person may resubmit its original bid, and the Master
Servicer shall accept the highest outstanding cash bid, regardless of from whom
received. No Interested Person shall be obligated to submit a bid to purchase
any Foreclosed Property, and notwithstanding anything to the contrary herein,
neither the Indenture Trustee, in its individual capacity, nor any of its
affiliates may bid for or purchase any Foreclosed Property pursuant hereto.

        (b)     In determining whether any bid constitutes a fair price for any
Foreclosed Property the Master Servicer shall take into account, and any
appraiser or other expert in real estate matters shall be instructed to take
into account, as applicable, among other factors, the financial standing of any
tenant of the Foreclosed Property, the physical condition of the Foreclosed
Property, and the state of the local and national economies.

        (c)     The Master Servicer shall act on behalf of the Indenture Trustee
in negotiating and taking any other action necessary or appropriate in
connection with the sale of any Foreclosed Property, including the collection of
all amounts payable in connection therewith. Any sale of a Foreclosed Property
shall be without recourse to the Indenture Trustee, the Master Servicer or the
Trust, and if consummated in accordance with the terms of this Agreement,
neither the Master Servicer nor the Indenture Trustee shall have any liability
to any Securityholder with respect to the purchase price therefor accepted by
the Master Servicer or the Indenture Trustee.

        Section 4.14. Management of Real Estate Owned.

        (a)     If the Trust acquires any Foreclosed Property pursuant to
Section 4.12, the Master Servicer shall have full power and authority, subject
only to the specific requirements and prohibitions of this Agreement, to do any
and all things in connection therewith as are consistent with the manner in
which the Master Servicer manages and operates similar property owned by the
Master Servicer or any of its affiliates, all on such terms and for such period
as the Master Servicer deems to be in the best interests of Securityholders.

        (b)     The Master Servicer may contract with any Person that is
Independent (an "Independent Contractor") for the operation and management of
any Foreclosed Property, provided that:


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                (i)     the terms and conditions of any such contract may not be
        inconsistent herewith;

                (ii)    any such contract shall require, or shall be
        administered to require, that the Independent Contractor remit all
        related Payments to the Master Servicer as soon as practicable, but in
        no event later than two Business Days following the receipt thereof by
        such Independent Contractor;

                (iii)   none of the provisions of this Section 4.14(b) relating
        to any such contract or to actions taken through any such Independent
        Contractor shall be deemed to relieve the Master Servicer of any of its
        duties and obligations to the Indenture Trustee for the benefit of
        Securityholders with respect to the operation and management of any such
        Foreclosed Property; and

                (iv)    the Master Servicer shall be obligated with respect
        thereto to the same extent as if it alone were performing all duties and
        obligations in connection with the operation and management of such
        Foreclosed Property.

The Master Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Master Servicer by such
Independent Contractor, and nothing in this Agreement shall be deemed to limit
or modify such indemnification. The Master Servicer shall be solely liable for
all fees owed by it to any such Independent Contractor, but shall be entitled to
be reimbursed for all such fees advanced by it pursuant to Section 4.08(b)(v) in
the manner provided in Section 4.09(b).

        Section 4.15. Inspections.

        The Master Servicer shall inspect or cause to be inspected each Property
that secures any Home Loan at such times and in such manner as are consistent
with the servicing standard set forth in Section 4.01.

        Section 4.16. Maintenance of Insurance.

        (a)     The Master Servicer shall cause to be maintained for each
Foreclosed Property acquired by the Trust such types and amounts of insurance
coverage as the Master Servicer shall deem reasonable. The Master Servicer shall
cause to be maintained for each Home Loan, fire and hazard insurance naming Mego
as loss payee thereunder providing extended coverage in an amount which is at
least equal to the least of (i) the maximum insurable value of the improvements
securing such Home Loan from time to time, (ii) the combined principal balance
owing on such Home Loan and any mortgage loan senior to such Home Loan and (iii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis. In cases in which any Property securing a Home Loan is located in a
federally designated flood area, the hazard insurance to be maintained for the
related Home Loan shall include flood insurance


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to the extent such flood insurance is available and the Master Servicer has
determined such insurance to be necessary in accordance with accepted mortgage
loan servicing standards for mortgage loans similar to the Mortgage Loans. All
such flood insurance shall be in amounts equal to the least of (A) the maximum
insurable value of the improvement securing such Home Loan, (B) the combined
principal balance owing on such Home Loan and any mortgage loan senior to such
Home Loan and (c) the maximum amount of insurance available to the lender under
the National Flood Insurance Act of 1968, as amended.

        (b)     Any amounts collected by the Master Servicer under any Insurance
Policies, shall be paid over or applied by the Master Servicer as follows:

                (i)     In the case of amounts received in respect of any Home
        Loan:

                  (A)   for the restoration or repair of the affected Property,
             in which event such amounts shall be released to the Obligor in
             accordance with the terms of the related Debt Instrument or to
             the extent not so used,

                  (B)   in reduction of the Principal Balance of the related
             Home Loan, in which event such amounts shall be credited to the
             Servicing Record,

unless the related instruments require a different application, in which case
such amounts shall be applied in the manner provided therein; and

                (ii)    Subject to Section 4.14, in the case of amounts received
        in respect of any Foreclosed Property, for the restoration or repair of
        such Foreclosed Property, unless the Master Servicer determines,
        consistent with the servicing standard set forth in Section 4.01, that
        such restoration or repair is not in the best economic interest of the
        Trust, in which event such amounts shall be credited, as of the date of
        receipt, to the applicable Servicing Record, as a Payment received from
        the operation of such Foreclosed Property.

        Section 4.17. Release of Files.

        (a)     If with respect to any Home Loan:

                (i)     the outstanding Principal Balance of such Home Loan plus
        all interest accrued thereon shall have been paid;

                (ii)    the Master Servicer, or the Servicer shall have
        received, in escrow, payment in full of such Home Loan in a manner
        customary for such purposes;

                (iii)   such Home Loan has become a Defective Loan and has been
        repurchased or a Qualified Substitute Home Loan has been conveyed to the
        Trust pursuant to Section 3.05;


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                (iv)    such Home Loan or the related Foreclosed Property has
        been sold in connection with the termination of the Trust pursuant to
        Section 11.01; or

                (v)     the related Foreclosed Property has been sold pursuant
        to Section 4.13.

In each such case, the Servicer shall deliver a certificate to the effect that
the Servicer has complied with all of its obligations under the Servicing
Agreement with respect to such Home Loan and requesting that the Indenture
Trustee release to the Servicer the related Home Loan File, then the Indenture
Trustee shall, within three Business Days or such shorter period as may be
required by applicable law, release (unless such Home Loan File has previously
been released), the related Home Loan File to the Servicer and execute and
deliver such instruments of transfer or assignment, in each case without
recourse, as shall be necessary to vest ownership of such Home Loan in the
Servicer or such other Person as may be specified in such certificate, the forms
of any such instrument to be appended to such certificate.

        (b)     From time to time and as appropriate for the servicing or
foreclosure of any Home Loan, the Indenture Trustee shall, upon request of the
Servicer, release the related Home Loan File (or any requested portion thereof)
to the Servicer. Such receipt shall obligate the Servicer, to return the Home
Loan File (or such portion thereof) to the Indenture Trustee when the need
therefor by the Servicer, no longer exists unless any of the conditions
specified in subsection (a) above, is satisfied prior thereto. The Indenture
Trustee shall release such receipt to the Servicer (i) upon the Servicer's
return of such Home Loan File (or such portion thereof) to the Indenture Trustee
or (ii) if any of the conditions specified in subsection (a) has been satisfied,
and the Servicer has not yet returned such Home Loan File (or such portion
thereof) to the Indenture Trustee, upon receipt of a certificate certifying that
any of such condition has been satisfied.

        Section 4.18. Filing of Continuation Statements.

        On or before the fifth anniversary of the filing of any financing
statements by Mego and the Depositor, respectively, with respect to the assets
conveyed to the Trust, Mego and the Depositor shall prepare, have executed by
the necessary parties and file in the proper jurisdictions all financing and
continuation statements necessary to maintain the liens, security interests, and
priorities of such liens and security interests that have been granted by Mego
and the Depositor, respectively, and Mego and the Depositor shall continue to
file on or before each fifth anniversary of the filing of any financing and
continuation statements such additional financing and continuation statements
until the Trust has terminated pursuant to Section 9.1 of the Trust Agreement.
The Indenture Trustee agrees to cooperate with Mego and the Depositor in
preparing, executing and filing such statements. The Indenture Trustee agrees to
notify Mego and the Depositor on the third Distribution Date prior to each such
fifth anniversary of the requirement to file such financing and continuation
statements. The filing of any such statement with respect to Mego and the
Depositor shall not be construed as any indication of an intent of any party
contrary to the expressed intent set forth in Section 2.04 hereof. If Mego or
the Depositor has ceased to do business whenever any such financing and
continuation statements must be filed or


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Mego or the Depositor fails to file any such financing statements or
continuation statements at least one month prior to the expiration thereof, the
Indenture Trustee shall perform the services required under this Section 4.18.

        Section 4.19. Fidelity Bond.

        The Master Servicer shall maintain a fidelity bond in such form and
amount as is customary for entities acting as custodian of funds and documents
in respect of loans on behalf of institutional investors and shall cause each
Servicer to maintain such fidelity bond in an amount that conforms to FNMA
levels.

        Section 4.20. Errors and Omissions Insurance.

        The Master Servicer shall obtain and maintain at all times during the
term of this Agreement errors and omissions insurance coverage covering the
Master Servicer and its employees issued by a responsible insurance company and
in an amount that conforms to FNMA levels. The issuer, policy terms and forms
and amounts of coverage, including applicable deductibles shall be in such form
and amount as is customary for entities acting as master servicers. The Master
Servicer agrees to notify the Indenture Trustee in writing within five (5) days
of the Master Servicer's receipt of notice of the cancellation or termination of
any such errors and omissions insurance coverage. The Master Servicer shall
cause the Servicer to maintain such errors and omissions insurance coverage as
provided herein and in an amount that conforms to FNMA Levels.


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                                   ARTICLE V.

                         ESTABLISHMENT OF TRUST ACCOUNTS

        Section 5.01 Collection Account and Note Distribution Account.

        (a) (1) Establishment of Collection Account. The Indenture Trustee has
heretofore established or caused to be established and shall hereafter maintain
or cause to be maintained a separate account denominated a Collection Account,
which in each case is and shall continue to be an Eligible Account in the name
of the Indenture Trustee and shall be designated "First Bank National
Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset
Backed Securities, Series 1997-3, Collection Account." The Master Servicer shall
cause all Payments received by the Servicer to be deposited to the Collection
Account no later than the second Business Day following the date of receipt
thereof by the Servicer. The Indenture Trustee shall provide to the Master
Servicer and the Servicer a monthly statement of all activity in the Collection
Account. Funds in the Collection Account shall be invested in accordance with
Section 5.04.

        (2)     Establishment of Note Distribution Account. The Indenture
Trustee has heretofore established with itself in its trust capacity at its
corporate trust department for the benefit of Securityholders an account
referred to herein as a Note Distribution Account. The Indenture Trustee shall
at all times maintain the Note Distribution Account as an Eligible Account and
shall cause such account to be designated "First Bank National Association, as
Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities,
Series 1997-3 Note Distribution Account."

        (b)     Withdrawals from Collection Account. No later than the second
Business Day preceding each Distribution Date, the Indenture Trustee shall
withdraw amounts from the Collection Account representing the Payments with
respect to the related Determination Date on deposit therein and deposit such
amounts into the Note Distribution Account and liquidate the Permitted
Investments in which such amounts are invested and distribute all net investment
earnings to the Servicer.

        (c)     Withdrawals from Note Distribution Account. On each Distribution
Date, the Indenture Trustee shall liquidate the Permitted Investments in which
amounts on deposit in the Note Distribution Account are invested and distribute
all net investment earnings to the Servicer and, to the extent funds are
available in the Note Distribution Account, the Indenture Trustee (based on the
information contained in the Master Servicer Certificate for such Distribution
Date) shall make the following withdrawals from the Note Distribution Account by
10:00 a.m. (New York City time) on such Distribution Date, in the following
order of priority:

                (i)     to distribute on such Distribution Date the following
        amounts pursuant to the Indenture, from the Collected Amount, in the
        following order:


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                        (a)     concurrently, to (x) the Master Servicer, the
                Master Servicer Fee, (y) the Servicer, the Servicer Fee, and (z)
                to the Indenture Trustee, the Indenture Trustee Fee, in each
                case for such Distribution Date;

                        (b)     to the Master Servicer or Servicer, any amount
                in respect of reimbursement of Interest Advances or Foreclosure
                Advances, to which the Master Servicer or any Servicer is
                entitled pursuant to Section 4.09 with respect to such
                Distribution Date;

                        (c)     to the Servicer, the Owner Trustee Fee Reserve,
                for such Distribution Date;

                   (ii) to distribute on such Distribution Date the Regular
        Distribution Amount pursuant to the Indenture, from the Collected Amount
        remaining after the application of clause (i), in the following order:

                        (a)     to the holders of each Class of Senior Notes, an
                amount equal to the applicable Noteholders' Interest
                Distributable Amount for such Distribution Date (any shortfall
                to be allocated, pro rata, based on the amount each such Class
                would be entitled to receive in the absence of any such
                shortfall);

                        (b)     first, to the holders of Class M-1 Notes and
                then to the holders of the Class M-2 Notes, in that order, an
                amount equal to the applicable Noteholders' Interest
                Distributable Amount for such Distribution Date;

                        (c)     to the Certificate Distribution Account for
                distribution pursuant to Section 5.03(b) to holders of the
                Certificates, an amount equal to the Certificateholders'
                Interest Distributable Amount for such Distribution Date;

                        (d)     sequentially, to the holders of the Class A-1,
                Class A-2, Class A-3 and Class A-4 Notes, in that order, until
                the respective Class Principal Balances thereof are reduced to
                zero, the amount necessary to reduce the aggregate Class
                Principal Balance of the Senior Notes to the Senior Optimal
                Principal Balance for such Distribution Date;

                        (e)     first, to the holders of the Class M-1 Notes and
                then to the holders of the Class M-2 Notes, the amount necessary
                to reduce the Class Principal Balances thereof to the Class M-1
                Optimal Principal Balance and the Class M-2 Optimal Principal
                Balance, respectively, for such Distribution Date;

                        (f)     to the Certificate Distribution Account for
                distribution pursuant to Section 5.03(b) to holders of the
                Certificates, the amount necessary to


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                reduce the Class Principal Balance thereof to the Certificate
                Optimal Principal Balance for such Distribution Date; and

                        (g)     sequentially, to the Class M-1 Notes, Class M-2
                Notes and the Certificates, in that order, until their
                respective Loss Reimbursement Entitlements have been paid in
                full (in the case of the Class M-1 and Class M-2 Notes, first to
                the reimbursement of Allocable Loss Amounts, until completely
                reimbursed, and then to any accrued interest thereon) (such
                amounts to be distributed to the holders of the Certificates
                pursuant to this clause (g) shall be deposited in the
                Certificate Distribution Account).

                (iii)   On each Distribution Date, the Indenture Trustee shall
        distribute the Excess Spread, if any, in the following order of
        priority:

                        (a)     in an amount equal to the Overcollateralization
                Deficiency Amount, if any, as follows:

                                (i)     sequentially, to the holders of the
                        Class A-1, Class A-2, Class A-3 and Class A-4 Notes, in
                        that order, until the respective Class Principal
                        Balances thereof are reduced to zero, the amount
                        necessary to reduce the aggregate of their Class
                        Principal Balances to the Senior Optimal Principal
                        Balance for such Distribution Date;

                                (ii)    first, to the holders of the Class M-1
                        Notes and then to the holders of the Class M-2 Notes, as
                        principal, until the respective Class Principal Balances
                        thereof have been reduced to the Class M-1 Optimal
                        Principal Balance and Class M-2 Optimal Principal
                        Balance, respectively, for such Distribution Date; and

                                (iii)   to the Certificate Distribution Account
                        for distribution pursuant to Section 5.03(b) to the
                        holders of the Certificates, until the Class Principal
                        Balance thereof has been reduced to the Certificate
                        Optimal Principal Balance for such Distribution Date;
                        and

                           (b) sequentially, to the Class M-1 Notes, the Class
               M-2 Notes and the Certificates, in that order, until their
               respective Loss Reimbursement Entitlements, if any, have been
               paid in full (in the case of the Class M-1 and Class M-2 Notes,
               first to the reimbursement of Allocable Loss Amounts, until
               completely reimbursed, and then to any accrued interest thereon)
               (such amounts to be distributed to the holders of the
               Certificates pursuant to this clause (g) shall be deposited in
               the Certificate Distribution Account); and


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                           (c) to any successor Master Servicer, if any, for
               such Distribution Date, amounts payable in accordance with
               Section 10.03(c) in addition to the Master Servicer Fee;

                           (d) to the Person entitled thereof, payments in 
               respect of Other Fees; and

                           (e) for deposit into the Certificate Distribution
               Account, for distribution pursuant to Section 5.03(b) on such
               Distribution Date, to the holders of the Residual Instruments,
               any remaining amount.

        (d)     Additional Withdrawals from Collection Account. On the third
Business Day prior to each Distribution Date, the Indenture Trustee, at the
direction of the Master Servicer shall also make the following withdrawals from
the Collection Account, in no particular order of priority:

                (i)     to withdraw any amount not required to be deposited in
        the Collection Account or deposited therein in error; and

                (ii)    to clear and terminate the Collection Account in
        connection with the termination of this Agreement.

        (e)     All distributions made on each Class of Notes on each
Distribution Date will be made on a pro rata basis among the Noteholders of such
Class of record on the preceding Record Date based on the Percentage Interest
represented by their respective Notes, and except as otherwise provided in the
next succeeding sentence, shall be made by wire transfer of immediately
available funds to the account of such Noteholder, if such Noteholder shall own
of record Notes representing at least a $1,000,000 Denomination and shall have
so notified the Indenture Trustee, and otherwise by check mailed, via first
class mail, postage prepaid, to the address of such Noteholder appearing in the
Note Register. The final distribution on each Note will be made in like manner,
but only upon presentment and surrender of such Note at the location specified
in the notice to Noteholders of such final distribution. Notwithstanding the
reduction of the Class Principal Balance of a Class to zero, the final
distribution with respect to each Class shall be made upon the earlier of (a)
the reduction of any Loss Reimbursement Entitlement with respect thereto to
zero, or (b) the Final Maturity Date for such Class.

        Whenever the Indenture Trustee, based on a Master Servicer Certificate,
expects that the final distribution with respect to a Class of Securities will
be made on the next Distribution Date, the Indenture Trustee shall, as soon as
practicable, mail to each Holder of such Class of Securities as of the
applicable Record Date a notice to the effect that:

                (i)     the Indenture Trustee expects that the final
        distribution with respect to such Class of Securities will be made on
        such Distribution Date, and


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                (ii)    no interest shall accrue on such Class of Securities
        after such Distribution Date provided that the final distribution occurs
        on such Distribution Date.

        Section 5.02 Allocation of Losses.

        (a)     In the event that the Payments received or collected in respect
of a Home Loan are less than the related Principal Balance plus accrued interest
thereon, or any Obligor makes a partial payment of any Monthly Payment due on a
Home Loan, such Payments or partial payment shall be applied to payment of the
related Debt Instrument, first to interest accrued at the Home Loan Interest
Rate and then to principal.

        (b)     On any Distribution Date, any Allocable Loss Amounts shall be
applied to the reduction of the Class Principal Balances of the Certificates,
the Class M-2 and Class M-1 Notes in accordance with the Allocable Loss Amount
Priority.

        Section 5.03 Certificate Distribution Account.

        (a)     Establishment. No later than the Closing Date, the Indenture
Trustee, will establish and maintain with the Indenture Trustee for the benefit
of the Owner Trustee on behalf of the Certificateholders and holders of Residual
Instruments one or more separate Eligible Accounts, which while the Indenture
Trustee holds such Trust Account shall be entitled "Certificate Distribution
Account, First Bank National Association, as Co-Owner Trustee, in trust for the
Mego Mortgage Home Loan Asset Backed Securities, Series 1997-3". Funds in the
Certificate Distribution Account shall be invested in accordance with Section
5.04.

        (b)     Distributions. On each Distribution Date, the Indenture Trustee
shall withdraw from the Note Distribution Account all amounts required to be
deposited in the Certificate Distribution Account with respect to the preceding
Due Period pursuant to Section 5.01(c)(ii)(c), (f) and (g) and
5.01(c)(iii)(a)(iii), (b) and (e) and will remit such amount to the Owner
Trustee or the Co-Owner Trustee for deposit into the Certificate Distribution
Account. On each Distribution Date, the Owner Trustee or the Co-Owner Trustee
shall distribute all amounts on deposit in the Certificate Distribution Account
to the Certificateholders and the holders of the Residual Instruments, as
specified and in accordance with the amounts calculated pursuant to the
foregoing sections of Section 5.01.

        (c)     All distributions made on the Certificates on each Distribution
Date will be made on a pro rata basis among the Certificateholders of record on
the immediately preceding Record Date based on the Percentage Interest
represented by their respective Certificates, and except as otherwise provided
in the next succeeding sentence, shall be made by wire transfer of immediately
available funds to the account of such Certificateholder, if such
Certificateholder shall own of record Certificates representing at least a 30%
Percentage Interest and shall have so notified the Owner Trustee or Co-Owner
Trustee, and otherwise by check mailed, via first class mail, postage prepaid,
to the address of such Certificateholder appearing in the Certificate Register.
The final distribution on each Certificate will be made in like manner, but only
upon


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presentment and surrender of such Certificate at the location specified in the
notice to holders of the Certificates of such final distribution.
Notwithstanding the reduction of the Class Principal Balance of a Class to zero,
the final distribution with respect to each Class shall be made upon the earlier
of (a) the reduction of any Loss Reimbursement Entitlement with respect thereto
to zero, and (b) the Final Maturity Date for such Class.

        (d)     All distributions made on the Residual Instruments on each
Distribution Date will be made on a pro rata basis among the holders of Residual
Instruments of record on the immediately preceding Record Date based on the
Percentage Interest represented by such Residual Instruments, and except as
otherwise provided in the next succeeding sentence, shall be made by wire
transfer of immediately available funds to the account of such holders of
Residual Instruments, if such holders of Residual Instruments shall own of
record Residual Instruments representing at least a 30% Percentage Interest and
shall have so notified the Owner Trustee or Co-Owner Trustee, and otherwise by
check mailed, via first class mail, postage prepaid, to the address of such
holder of Residual Instruments appearing in the Certificate Register. The final
distribution on each Residual Instrument will be made in like manner, but only
upon presentment and surrender of such Residual Instrument at the location
specified in the notice to holders of the Residual Instruments of such final
distribution.

        Section 5.04 Trust Accounts; Trust Account Property.

        (a)     Control of Trust Accounts. Each of the Trust Accounts
established hereunder has been pledged by the Issuer to the Indenture Trustee
under the Indenture and shall be subject to the lien of the Indenture. In
addition to the provisions hereunder, each of the Trust Accounts shall also be
established and maintained pursuant to the Indenture. Amounts distributed from
each Trust Account in accordance with the Indenture and this Agreement shall be
released from the lien of the Indenture upon such distribution thereunder or
hereunder. The Indenture Trustee shall possess all right, title and interest in
all funds on deposit from time to time in the Trust Accounts (other than the
Certificate Distribution Account) and in all proceeds thereof and all such
funds, investments, proceeds shall be part of the Trust Account Property and the
Trust Estate. If, at any time, any Trust Account ceases to be an Eligible
Account, the Indenture Trustee (or the Master Servicer on its behalf) shall
within 10 Business Days (or such longer period, not to exceed 30 calendar days,
as to which each Rating Agency may consent) (i) establish a new Trust Account as
an Eligible Account, (ii) terminate the ineligible Trust Account, and (iii)
transfer any cash and investments from such ineligible Trust Account to such new
Trust Account.

        With respect to the Trust Accounts (other than the Certificate
Distribution Account), the Indenture Trustee agrees, by its acceptance hereof,
that each such Trust Account shall be subject to the sole and exclusive custody
and control of the Indenture Trustee for the benefit of the Securityholders and
the Issuer, as the case may be, and the Indenture Trustee shall have sole
signature and withdrawal authority with respect thereto.

        In addition to this Agreement and the Indenture, the Certificate
Distribution Account established hereunder also shall be subject to and
established and maintained in accordance with


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the Trust Agreement. Subject to rights of the Indenture Trustee hereunder and
under the Indenture, the Owner Trustee and the Co-Owner Trustee shall possess
all right, title and interest for the benefit of the Securityholders in all
funds on deposit from time to time in the Certificate Distribution Account and
in all proceeds thereof (including all income thereon) and all such funds,
investments, proceeds and income shall be part of the Trust Account Property and
the Trust Estate. Subject to the rights of the Indenture Trustee, the Owner
Trustee and Co-Owner Trustee agree, by its acceptance hereof, that such
Certificate Distribution Account shall be subject to the sole and exclusive
custody and control of the Owner Trustee or Co-Owner Trustee for the benefit of
the Issuer and the parties entitled to distributions therefrom, including
without limitation, the Certificateholders, the holders of Residual Instruments
and the Owner Trustee and the Co-Owner Trustee shall have sole signature and
withdrawal authority with respect to the Certificate Distribution Account.
Notwithstanding the preceding, the distribution of amounts from the Certificate
Distribution Account in accordance with Section 5.03(b) also shall be made for
the benefit of the Indenture Trustee (with respect to its duties under the
Indenture and this Agreement relating to the Trust Estate), and the Indenture
Trustee (in its capacity as Indenture Trustee) shall have the right, but not the
obligation to take custody and control of the Certificate Distribution Account
and to cause the distribution of amounts therefrom in the event that the Owner
Trustee or Co-Owner Trustee fails to distribute such amounts in accordance with
Section 5.03(b).

        The Master Servicer shall have the power, revocable by the Indenture
Trustee or by the Owner Trustee or Co-Owner Trustee with the consent of the
Indenture Trustee, to instruct the Indenture Trustee, Co-Owner Trustee or Owner
Trustee to make withdrawals and payments from the Trust Accounts for the purpose
of permitting the Master Servicer to carry out its respective duties hereunder
or permitting the Indenture Trustee or Owner Trustee to carry out its duties
herein or under the Indenture or the Trust Agreement, as applicable.

        (b) (1) Investment of Funds. The funds held in any Trust Account may
only be invested (to the extent practicable and consistent with any requirements
of the Code) in Permitted Investments, as directed by a Responsible Officer of
Mego in writing. In any case, funds in any Trust Account must be available for
withdrawal without penalty, and any Permitted Investments and the funds held in
any Trust Account, other than the Note Distribution Account, must mature or
otherwise be available for withdrawal, not later than three (3) Business Days
immediately preceding the Distribution Date next following the date of such
investment and shall not be sold or disposed of prior to its maturity subject to
Section 5.04(b)(2) below. Amounts deposited to the Note Distribution Account
pursuant to Section 5.01(b) prior to each Distribution Date shall be invested in
Permitted Investments which are overnight investments from the date of deposit
to the Business Day preceding each Distribution Date. All interest and any other
investment earnings on amounts or investments held in any Trust Account shall be
deposited into such Trust Account immediately upon receipt by the Indenture
Trustee, or in the case of the Certificate Distribution Account, the Owner
Trustee or Co-Owner Trustee, as applicable. All Permitted Investments in which
funds in any Trust Account (other than the Certificate Distribution Account) are
invested must be held by or registered in the name of "First Bank National
Association, as Indenture Trustee, in trust for the Mego Mortgage Home Loan
Asset Backed Securities, Series


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<PAGE>   75



1997-3". While the Co-Owner Trustee holds the Certificate Distribution Account,
all Permitted Investments in which funds in the Certificate Distribution Account
are invested shall be held by or registered in the name of "First Bank National
Association, as Co-Owner Trustee, in trust for the Mego Mortgage Home Loan Asset
Backed Securities, Series 1997-3".

        (2)     Insufficiency and Losses in Trust Accounts. If any amounts are
needed for disbursement from any Trust Account and sufficient uninvested funds
are not available to make such disbursement, the Indenture Trustee, or Owner
Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account,
shall cause to be sold or otherwise converted to cash a sufficient amount of the
investments in such Trust Account. The Indenture Trustee, or Owner Trustee or
Co-Owner Trustee in the case of the Certificate Distribution Account, shall not
be liable for any investment loss or other charge resulting therefrom, unless
such loss or charge is caused by the failure of the Indenture Trustee or Owner
Trustee or Co-Owner Trustee, respectively, to perform in accordance with this
Section 5.04.

        If any losses are realized in connection with any investment in any
Trust Account pursuant to this Agreement and the Indenture, then Mego shall
deposit the amount of such losses (to the extent not offset by income from other
investments in such Trust Account) in such Trust Account immediately upon the
realization of such loss. All interest and any other investment earnings on
amounts held in any Trust Account shall be taxed to the holders of the Residual
Instruments.

        (c)     Subject to Section 6.1 of the Indenture, the Indenture Trustee
shall not in any way be held liable by reason of any insufficiency in any Trust
Account held by the Indenture Trustee resulting from any investment loss on any
Permitted Investment included therein (except to the extent that the Indenture
Trustee is the obligor and has defaulted thereon).

        (d)     With respect to the Trust Account Property, the Indenture
Trustee acknowledges and agrees that:

                (1)     any Trust Account Property that is held in deposit
        accounts shall be held solely in the Eligible Accounts; and each such
        Eligible Account shall be subject to the exclusive custody and control
        of the Indenture Trustee, and the Indenture Trustee shall have sole
        signature authority with respect thereto;

                (2)     any Trust Account Property that constitutes Physical
        Property shall be delivered to the Indenture Trustee in accordance with
        paragraph (a) of the definition of "Delivery" and shall be held, pending
        maturity or disposition, solely by the Indenture Trustee or a financial
        intermediary (as such term is defined in Section 8-313(4) of the UCC)
        acting solely for the Indenture Trustee;

                (3)     any Trust Account Property that is a book-entry security
        held through the Federal Reserve System pursuant to federal book-entry
        regulations shall be delivered in accordance with paragraph (b) of the
        definition of "Delivery" and shall be maintained by


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        the Indenture Trustee, pending maturity or disposition, through
        continued book-entry registration of such Trust Account Property as
        described in such paragraph; and

                (4)     any Trust Account Property that is an "uncertificated
        security" under Article VIII of the UCC and that is not governed by
        clause (3) above shall be delivered to the Indenture Trustee in
        accordance with paragraph (c) of the definition of "Delivery" and shall
        be maintained by the Indenture Trustee, pending maturity or disposition,
        through continued registration of the Indenture Trustee's (or its
        nominee's) ownership of such security.

        Section 5.05 Servicer to Pay Owner Trustee Fee. On the Distribution Date
occurring in July each year during the term of this Agreement, commencing in
July 1998, the Servicer shall pay to the Owner Trustee, the Owner Trustee Fee.


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                                   ARTICLE VI.

              STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS

        Section 6.01 Master Servicing Certificate. On each Determination Date,
the Master Servicer shall deliver to the Indenture Trustee, the Owner Trustee
and Co-Owner Trustee, a certificate containing the items described in Exhibit B
hereto (each, a "Master Servicer Certificate"), prepared as of the related
Determination Date and executed by a Master Servicing Officer. No later than the
Business Day following each Determination Date, the Master Servicer shall
deliver to the Indenture Trustee, in a format consistent with other electronic
loan level reporting supplied by the Master Servicer in connection with similar
transactions, "loan level" information with respect to the Home Loans as of the
related Determination Date, to the extent that such information has been
provided to the Master Servicer by the Servicer. The Indenture Trustee may rely
on the Master Servicer Certificate with respect to the matters set forth
therein.

        Section 6.02 Statement to Securityholders. On or before the third
Business Day following each Distribution Date, the Indenture Trustee shall mail:
to each Holder of a Security (with a copy to the Depositor and the Rating
Agency) at its address shown on the Certificate Register or Note Register, as
applicable, a statement, based on information set forth in the Master Servicer
Certificate for such Distribution Date, substantially in the form of Statement
to Securityholders attached hereto as Exhibit C, respectively, together with a
copy of such related Master Servicer Certificate.


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                                  ARTICLE VII.

                                   [Reserved]

 
                                       74


<PAGE>   79



                                  ARTICLE VIII.

                                   [Reserved]

 
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<PAGE>   80




                                   ARTICLE IX.

                               THE MASTER SERVICER

        Section 9.01 Indemnification; Third Party Claims.

        (a)     The Master Servicer shall be liable in accordance herewith only
to the extent of the obligations specifically imposed upon and undertaken by the
Master Servicer herein and the representations made by the Master Servicer.

        (b)     The Master Servicer shall indemnify, defend and hold harmless
the Trust, the Indenture Trustee, Owner Trustee, the Co-Owner Trustee, Mego and
the Depositor, their respective officers, directors, agents and employees and
the Securityholders from and against any and all costs, expenses, losses,
claims, damages, and liabilities to the extent that such cost, expense, loss,
claim, damage or liability arose out of, or was imposed upon the Trust,
Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, Mego, the Depositor,
or the Securityholders through the breach of this Agreement by the Master
Servicer, the negligence, willful misfeasance, or bad faith of the Master
Servicer in the performance of its duties under this Agreement or by reason of
reckless disregard of its obligations and duties under this Agreement. Such
indemnification shall include, without limitation, reasonable fees and expenses
of counsel and expenses of litigation.

        Section 9.02 Merger or Consolidation of the Master Servicer.

        The Master Servicer shall not merge or consolidate with any other
person, convey, transfer or lease substantially all its assets as an entirety to
another Person, or permit any other Person to become the successor to the Master
Servicer's business unless, after the merger, consolidation, conveyance,
transfer, lease or succession, the successor or surviving entity (i) shall be an
Eligible Servicer, (ii) shall be capable of fulfilling the duties of the Master
Servicer contained in this Agreement and (iii) shall have a long-term debt
rating which is BBB and Baa2 by Standard & Poor's and Moody's respectively. Any
corporation (i) into which the Master Servicer may be merged or consolidated,
(ii) resulting from any merger or consolidation to which the Master Servicer
shall be a party, (iii) which acquires by conveyance, transfer or lease
substantially all of the assets of the Master Servicer, or (iv) succeeding to
the business of the Master Servicer, in any of the foregoing cases shall execute
an agreement of assumption to perform every obligation of the Master Servicer
under this Agreement and, whether or not such assumption agreement is executed,
shall be the successor to the Master Servicer under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties to this Agreement, anything in this Agreement to the contrary
notwithstanding; provided, however, that nothing contained herein shall be
deemed to release the Master Servicer from any obligation. The Master Servicer
shall provide notice of any merger, consolidation or succession pursuant to this
Section 9.02 to the Owner Trustee, the Indenture Trustee and each Rating Agency.
Notwithstanding the foregoing, as a condition to the consummation of the
transactions referred


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<PAGE>   81



to in clauses (i) through (iv) above, (x) immediately after giving effect to
such transaction, no representation or warranty made pursuant to Section 3.02
shall have been breached (for purposes hereof, such representations and
warranties shall speak as of the date of the consummation of such transaction),
and (y) the Master Servicer shall have delivered to the Owner Trustee and the
Indenture Trustee an Officer's Certificate and an Opinion of Counsel each
stating that such consolidation, merger or succession and such agreement of
assumption comply with this Section 9.02 and that all conditions precedent, if
any, provided for in this Agreement relating to such transaction have been
complied with.

        Section 9.03 Limitation on Liability of the Master Servicer and Others.

        Neither the Master Servicer nor any of its directors, officers,
employees or agents shall be under any liability to the Trust or to the
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Master Servicer or
any such Person against any breach of warranties, representations or covenants
made herein or any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in performing or failing to perform
duties hereunder or by reason of reckless disregard of obligations and duties
hereunder. The Master Servicer and any of its directors, officers, employees or
agents may rely in good faith on any document of any kind prima facie properly
executed and submitted by any Person respecting any matters arising hereunder.

        Section 9.04 Master Servicer Not to Resign; Assignment.

        (a)     The Master Servicer shall not resign from the obligations and
duties hereby imposed on it except (i) with the consent of the Rating Agencies
or (ii) upon determination that by reason of a change in legal requirements the
performance of its duties under this Agreement would cause it to be in violation
of such legal requirements in a manner which would result in a material adverse
effect on the Master Servicer. Any such determination permitting the resignation
of the Master Servicer by reason of a change in such legal requirements shall be
evidenced by an Opinion of Counsel to such effect delivered and acceptable to
the Indenture Trustee. No resignation of the Master Servicer shall become
effective until the Indenture Trustee or a successor master servicer shall have
assumed the Master Servicer's servicing responsibilities and obligations in
accordance with Section 10.02.

        (b)     Notwithstanding anything to the contrary herein, the Master
Servicer shall remain liable for all liabilities and obligations incurred by it
as Master Servicer hereunder prior to the time that any resignation or
assignment referred to in subsection (a) above or termination under Section
10.01 becomes effective, including the obligation to indemnify the Indenture
Trustee pursuant to Section 9.01(b) hereof.

        (c)     The Master Servicer agrees to cooperate with any successor
Master Servicer in effecting the transfer of the Master Servicer's servicing
responsibilities and rights hereunder pursuant to subsection (a), including,
without limitation, the transfer to such successor of all


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relevant records and documents (including any Home Loan Files in the possession
of the Master Servicer and the Servicing Record) and all amounts credited to the
Servicing Record or thereafter received with respect to the Home Loans and not
otherwise permitted to be retained by the Master Servicer pursuant to this
Agreement. In addition, the Master Servicer, at its sole cost and expense, shall
prepare, execute and deliver any and all documents and instruments to the
successor Master Servicer including all Home Loan Files in its possession and do
or accomplish all other acts necessary or appropriate to effect such termination
and transfer of servicing responsibilities.

        Section 9.05 Relationship of Master Servicer to Issuer and the Indenture
Trustee.

        The relationship of the Master Servicer (and of any successor to the
Master Servicer as servicer under this Agreement) to the Issuer and the
Indenture Trustee under this Agreement is intended by the parties hereto to be
that of an independent contractor and not of a joint venturer, agent or partner
of the Issuer or the Indenture Trustee.

        Section 9.06 Master Servicer May Own Notes.

        Each of the Master Servicer and any affiliate of the Master Servicer may
in its individual or any other capacity become the owner or pledgee of Notes
with the same rights as it would have if it were not the Master Servicer or an
affiliate thereof except as otherwise specifically provided herein. Notes so
owned by or pledged to the Master Servicer or such affiliate shall have an equal
and proportionate benefit under the provisions of this Agreement, without
preference, priority, or distinction as among all of the Notes, provided that
any Notes owned by the Master Servicer or any affiliate thereof, during the time
such Notes are owned by them, shall be without voting rights for any purpose set
forth in this Agreement. The Master Servicer shall notify the Indenture Trustee
promptly after it or any of its affiliates becomes the owner or pledgee of a
Note.


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<PAGE>   83



                                   ARTICLE X.

                                     DEFAULT

        Section 10.01 Events of Default.

        For purposes of this Agreement, each of the following shall constitute
an "Event of Default."

        (a)     failure by the Master Servicer to deposit or cause the Servicer
to deposit all Payments in the Collection Account no later than the second
Business Day following receipt thereof by the Master Servicer or Servicer, which
failure continues unremedied for two Business Days; or

        (b)     failure on the part of the Master Servicer duly to observe or
perform in any material respect any of its other covenants or agreements
contained in this Agreement that continues unremedied for a period of 30 days
after the earlier of (x) the date on which the Master Servicer gives notice of
such failure to the Indenture Trustee pursuant to Section 4.04(b) and (y) the
date on which written notice of such failure, requiring the same to be remedied,
shall have been given to the Master Servicer by the Indenture Trustee, or to the
Master Servicer and the Indenture Trustee pursuant to the direction of the
Majority Securityholders; or

        (c)     failure by the Master Servicer to deliver to the Indenture
Trustee the Master Servicer Certificate by the fourth Business Day prior to each
Distribution Date; or

        (d)     the entry of a decree or order for relief by a court or
regulatory authority having jurisdiction in respect of the Master Servicer in an
involuntary case under the federal bankruptcy laws, as now or hereafter in
effect, or another present or future, federal or state, bankruptcy, insolvency
or similar law, or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or other similar official of the Master Servicer or of
any substantial part of its properties or ordering the winding up or liquidation
of the affairs of the Master Servicer and the continuance of any such decree or
order unstayed and in effect for a period of 60 consecutive days or the
commencement of an involuntary case under the federal bankruptcy laws, as now or
hereinafter in effect, or another present or future federal or state bankruptcy,
insolvency or similar law and such case is not dismissed within 60 days; or

        (e)     the commencement by the Master Servicer of a voluntary case
under the federal bankruptcy laws, as now or hereinafter in effect, or any other
present or future, federal or state bankruptcy, insolvency or similar law, or
the consent by the Master Servicer to the appointment of or taking possession by
a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Master Servicer or of any substantial part of its
property or the making by the Master Servicer of an assignment for the benefit
of creditors or the failure by the Master Servicer generally to pay its debts as
such debts become due or the taking of corporate


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<PAGE>   84



action by the Master Servicer in furtherance of any of the foregoing or the
admission in writing by the Master Servicer of an inability to pay its debts as
they become due; or

        (f)     any representation, warranty or statement of the Master Servicer
made in this Agreement or any certificate, report or other writing delivered
pursuant hereto shall prove to be incorrect in any material respect as of the
time when the same shall have been made, and the incorrectness of such
representation, warranty or statement has a material adverse effect on the Trust
and, within 30 days of the earlier of (x) the date on which the Master Servicer
gives notice of such failure to the Indenture Trustee pursuant to Section
4.04(b) and (y) the date on which written notice thereof shall have been given
to the Master Servicer by the Indenture Trustee or the Majority Securityholders,
the circumstances or condition in respect of which such representation, warranty
or statement was incorrect shall not have been eliminated or otherwise cured; or

        (g)     failure on the part of the Master Servicer to deposit into the
Note Distribution Account within 3 Business Days following the related
Determination Date any Interest Advance pursuant to Section 4.08; or

        (h)     the Total Expected Loan Loss Percentage exceeds 21% prior to the
fifth anniversary of the Cut-Off Date or 31.50% thereafter.

        Section 10.02 Consequences of an Event of Default.

        If an Event of Default shall occur and be continuing, the Indenture
Trustee at the direction of the Majority Securityholders, by notice given in
writing to the Master Servicer may terminate all of the rights and obligations
of the Master Servicer under this Agreement. On or after the receipt by the
Master Servicer of such written notice, and the appointment of and acceptance by
a successor Master Servicer, all authority, power, obligations and
responsibilities of the Master Servicer under this Agreement, whether with
respect to the Securities or the Trust or otherwise, shall pass to, be vested in
and become obligations and responsibilities of the successor Master Servicer;
provided, however, that the successor Master Servicer shall have no liability
with respect to any obligation which was required to be performed by the prior
Master Servicer prior to the date that the successor Master Servicer becomes the
Master Servicer or any claim of a third party based on any alleged action or
inaction of the prior Master Servicer. The successor Master Servicer is
authorized and empowered by this Agreement to execute and deliver, on behalf of
the prior Master Servicer, as attorney-in-fact or otherwise, any and all
documents and other instruments and to do or accomplish all other acts or things
necessary or appropriate to effect the purposes of such notice of termination.
The prior Master Servicer agrees to cooperate with the successor Master Servicer
in effecting the termination of the responsibilities and rights of the prior
Master Servicer under this Agreement, including, without limitation, the
transfer to the successor Master Servicer for administration by it of all cash
amounts that shall at the time be held by the prior Master Servicer for deposit,
or have been deposited by the prior Master Servicer, in the Collection Account
or thereafter received with respect to the Home Loans and the delivery to the
successor Master Servicer of all Home Loan Files in the Master Servicer's


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<PAGE>   85



possession and a computer tape in readable form containing the Servicing Record
and any other information necessary to enable the successor Master Servicer to
service the Home Loans. In addition to any other amounts that are then payable
to the terminated Master Servicer under this Agreement, the terminated Master
Servicer shall then be entitled to receive (to the extent provided by Section
4.09) out of the Collected Amount, reimbursements for any outstanding Interest
Advances made during the period prior to the notice pursuant to this Section
10.02 which terminates the obligation and rights of the terminated Master
Servicer under this Agreement. The Indenture Trustee and the successor Master
Servicer may set off and deduct any amounts owed by the terminated Master
Servicer from any amounts payable to the terminated Master Servicer. The
terminated Master Servicer shall grant the Indenture Trustee, and the successor
Master Servicer reasonable access to the terminated Master Servicer's premises
at the terminated Master Servicer's expense.

        Section 10.03 Appointment of Successor.

        (a)     On or after the time the Master Servicer receives a notice of
termination pursuant to Section 10.02 or upon the resignation of the Master
Servicer pursuant to Section 9.04, the Indenture Trustee shall be the successor
in all respects to the Master Servicer in its capacity as master servicer under
this Agreement and the transactions set forth or provided for in this Agreement,
and shall be subject to all the responsibilities, restrictions, duties,
liabilities and termination provisions relating thereto placed on the Master
Servicer by the terms and provisions of this Agreement. The Indenture Trustee
shall take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession. If the Indenture Trustee or any other successor
Master Servicer is acting as Master Servicer hereunder, it shall be subject to
termination under Section 10.02 upon the occurrence of an Event of Default
applicable to it as Master Servicer.

        (b)     Any successor Master Servicer appointed pursuant to the
provisions of this Agreement shall execute, acknowledge and deliver to the
Indenture Trustee and its predecessor Master Servicer an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor Master Servicer shall become effective.

        (c)     Any successor Master Servicer shall be entitled to such
compensation (whether payable out of the Collected Amount or otherwise) as the
Master Servicer would have been entitled to under the Agreement if the Master
Servicer had not resigned or been terminated hereunder. In addition, any
successor Master Servicer shall be entitled, to reasonable transition expenses
incurred in acting as successor Master Servicer pursuant to Section
5.01(c)(iii)(c).

        Section 10.04 Notification to Certificateholders.

        Upon any termination of the Master Servicer or appointment of a
successor to the Master Servicer, the Indenture Trustee shall give prompt
written notice thereof to Securityholders at their respective addresses
appearing in the Note Register and Certificate Register.


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        Section 10.05 Waiver of Past Defaults.

        The Majority Securityholders may, on behalf of all Securityholders,
waive any default by the Master Servicer in the performance of its obligations
hereunder and its consequences. Upon any such waiver of a past default, such
default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereon.


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<PAGE>   87



                                   ARTICLE XI.

                                   TERMINATION

        Section 11.01 Termination.

        (a)     This Agreement shall terminate upon notice to the Indenture
Trustee of either: (a) the later of (i) the satisfaction and discharge of the
Indenture pursuant to Section 4.1 of the Indenture or (ii) the disposition of
all funds with respect to the last Home Loan and the remittance of all funds due
hereunder and the payment of all amounts due and payable to the Indenture
Trustee, the Owner Trustee, the Co-Owner Trustee, the Issuer, the Master
Servicer and the Servicer; or (b) the mutual consent of the Master Servicer, the
Depositor, the Seller and all Securityholders in writing.

        (b)     Subject to the provisions of the following sentence, Mego or, if
such option is not exercised by Mego, the Master Servicer may, at its option
upon not less than thirty days' prior notice given to the Indenture Trustee at
any time on or after the applicable Early Termination Notice Date, purchase on
the Termination Date specified in such notice, all, but not less than all, the
Home Loans and Foreclosed Properties then included in the Trust, at a purchase
price (the "Termination Price"), payable in cash, equal to the sum of:

                (i)     the Principal Balance of each Home Loan included in the
        Trust as of such Monthly Cut-Off Date;

                (ii)    all unpaid interest accrued on the Principal Balance of
        each such Loan at the related Home Loan Interest Rate to such Monthly
        Cut-Off Date; and

                (iii)   the aggregate fair market value of each Foreclosed
        Property included in the Trust on such Monthly Cut-Off Date, as
        determined by an Independent appraiser acceptable to the Trustee as of a
        date not more than thirty days prior to such Monthly Cut-Off Date.

The expense of any Independent appraiser required under this Section 11.01(b)
shall be a nonreimbursable expense of the party exercising the purchase option
pursuant to this Section 11.01(b). Mego or the Master Servicer shall effect the
purchase referred to in this Section 11.01(b) by deposit of the Termination
Price into the Note Distribution Account.

        Section 11.02  Notice of Termination.

        Notice of termination of this Agreement or of early redemption and
termination of the Securities shall be sent (i) by the Indenture Trustee to the
Noteholders in accordance with Section 2.6(b) of the Indenture and (ii) by the
Owner Trustee or Co-Owner Trustee to the Certificateholders and holders of
Residual Instruments in accordance with Section 9.1(d) of the Trust Agreement.


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<PAGE>   88



                                  ARTICLE XII.

                            MISCELLANEOUS PROVISIONS

        Section 12.01 Acts of Securityholders.

        Except as otherwise specifically provided herein, whenever
Securityholder action, consent or approval is required under this Agreement,
such action, consent or approval shall be deemed to have been taken or given on
behalf of, and shall be binding upon, all Securityholders if the Majority
Securityholders agree to take such action or give such consent or approval.

        Section 12.02 Amendment.

        (a)     This Agreement may be amended from time to time by the
Depositor, the Master Servicer, the Seller and the Issuer by written agreement
with notice thereof to the Securityholders, without the consent of any of the
Securityholders, to cure any error or ambiguity, to correct or supplement any
provisions hereof which may be defective or inconsistent with any other
provisions hereof or to add any other provisions with respect to matters or
questions arising under this Agreement; provided, however, that such action will
not adversely affect in any material respect the interests of the
Securityholders. An amendment described above shall be deemed not to adversely
affect in any material respect the interests of the Securityholders if either
(i) an opinion of counsel is obtained to such effect, or (ii) the party
requesting the amendment obtains a letter from each of the Rating Agencies
confirming that the amendment, if made, would not result in the downgrading or
withdrawal of the rating then assigned by the respective Rating Agency to any
Class of Securities then outstanding.

        (b)     This Agreement may also be amended from time to time by the
Depositor, the Master Servicer, the Seller and the Issuer by written agreement,
with the prior written consent of the Indenture Trustee and the Majority
Securityholders, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Agreement, or of modifying
in any manner the rights of the Securityholders; provided, however, that no such
amendment shall (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on Home Loans or distributions which are required to be
made on any Security, without the consent of the holders of 100% of each Class
of Notes, Certificates or Residual Instruments affected thereby, (ii) adversely
affect in any material respect the interests of the holders of any Class of
Notes, Certificates or Residual Instruments in any manner other than as
described in (i), without the consent of the holders of 100% of such Class of
Notes, the Certificates or Residual Instruments, respectively, or (iii) reduce
the percentage of any Class of Notes, Certificates or Residual Instruments, the
holders of which are required to consent to any such amendment, without the
consent of the holders of 100% of such Class of Notes or the Certificates or
Residual Instruments.


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<PAGE>   89



        (c)     It shall not be necessary for the consent of Securityholders
under this Section to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent shall approve the substance thereof.

        Prior to the execution of any amendment to this Agreement, the Issuer
shall be entitled to receive and rely upon an opinion of counsel stating that
the execution of such amendment is authorized or permitted by this Agreement.
The Issuer may, but shall not be obligated to, enter into any such amendment
which affects the Issuer's own rights, duties or immunities under this
Agreement.

        Section 12.03 Recordation of Agreement.

        To the extent permitted by applicable law, this Agreement, or a
memorandum thereof if permitted under applicable law, is subject to recordation
in all appropriate public offices for real property records in all of the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Master Servicer at the
Securityholders' expense on direction of the Indenture Trustee or the Majority
Securityholders, but only when accompanied by an opinion of counsel to the
effect that such recordation materially and beneficially affects the interests
of the Securityholders or is necessary for the administration or servicing of
the Home Loans.

        Section 12.04 Duration of Agreement.

        This Agreement shall continue in existence and effect until terminated
as herein provided.

        Section 12.05 Governing Law.

        THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.

        Section 12.06 Notices.

        All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by overnight mail, certified mail or registered mail, postage prepaid, to: (i)
in the case of the Depositor, FINANCIAL ASSET SECURITIES CORP., 600 Steamboat
Road, Greenwich, Connecticut 06830, Attention: Peter McMullin, or such other
addresses as may hereafter be furnished to the Securityholders and the other
parties hereto in writing by the Depositor, (ii) in the case of the Issuer, Mego
Mortgage Home Loan Owner Trust 1997-3, c/o Wilmington Trust Company, Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention:
Emmett R. Harmon, or such other


                                       85


<PAGE>   90



address as may hereafter be furnished to the Securityholders and the other
parties hereto, (iii) in the case of the Seller and Servicer, MEGO MORTGAGE
CORPORATION, 1000 Parkwood Circle, Atlanta, Georgia 30339, Attention: Jeff
Moore, President, or such other address as may hereafter be furnished to the
Securityholders and the other parties hereto, (iv) in the case of the Indenture
Trustee or Co-Owner Trustee, FIRST BANK NATIONAL ASSOCIATION, 180 East Fifth
Street, St. Paul, Minnesota 55101, Attention: Structured Finance: Mego 1997-3,
(v) in the case of the Master Servicer, 11000 Broken Land Parkway, Columbia,
Maryland 21044-3562, Attention: Master Servicing Department, Mego Mortgage Home
Loan Owner Trust 1997-3; and (vi) in the case of the Securityholders, as set
forth in the applicable Note Register and Certificate Register. Any such notices
shall be deemed to be effective with respect to any party hereto upon the
receipt of such notice by such party, except that notices to the Securityholders
shall be effective upon mailing or personal delivery.

        Section 12.07 Severability of Provisions.

        If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be held invalid for any reason whatsoever, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other covenants,
agreements, provisions or terms of this Agreement.

        Section 12.08 No Partnership.

        Nothing herein contained shall be deemed or construed to create any
partnership or joint venture between the parties hereto and the services of the
Master Servicer shall be rendered as an independent contractor.

        Section 12.09 Counterparts.

        This Agreement may be executed in one or more counterparts and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same Agreement.

        Section 12.10 Successors and Assigns.

        This Agreement shall inure to the benefit of and be binding upon the
Master Servicer, the Seller, the Servicer, the Depositor, the Issuer, the
Indenture Trustee and the Securityholders and their respective successors and
permitted assigns.

        Section 12.11 Headings.

        The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement.


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<PAGE>   91



        Section 12.12 Actions of Securityholders.

        (a)     Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Securityholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Securityholders in person or by agent
duly appointed in writing; and except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Depositor, the Master Servicer or the Issuer. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Agreement and conclusive in favor of the
Depositor, the Master Servicer and the Issuer if made in the manner provided in
this Section.

        (b)     The fact and date of the execution by any Securityholder of any
such instrument or writing may be proved in any reasonable manner which the
Depositor, the Master Servicer or the Issuer deems sufficient.

        (c)     Any request, demand, authorization, direction, notice, consent,
waiver or other act by a Securityholder shall bind every holder of every
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof, in respect of anything done, or omitted to be done,
by the Depositor, the Master Servicer or the Issuer in reliance thereon, whether
or not notation of such action is made upon such Security.

        (d)     The Depositor, the Master Servicer or the Issuer may require
additional proof of any matter referred to in this Section 12.12 as it shall
deem necessary.

        Section 12.13 Reports to Rating Agencies.

        (a) The Indenture Trustee shall provide to each Rating Agency copies of
statements, reports and notices, to the extent received or prepared by the
Master Servicer hereunder, as follows:

                (i)     copies of amendments to this Agreement;

                (ii)    notice of any substitution or repurchase of any Home
        Loans;

                (iii)   notice of any termination, replacement, succession,
        merger or consolidation of either the Master Servicer or the Issuer;

                (iv)    notice of final payment on the Notes, the Certificates
        and the Residual Instruments;

                (v)     notice of any Event of Default;


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<PAGE>   92



                (vi)    copies of the annual independent auditor's report
        delivered pursuant to Section 4.05, and copies of any compliance reports
        delivered by the Master Servicer hereunder including Section 4.04; and

                (vii)   copies of any Master Servicer's Certificate pursuant to
        Section 6.02(b); and

        (b)     With respect to the requirement of the Indenture Trustee to
provide statements, reports and notices to the Rating Agencies such statements,
reports and notices shall be delivered to the Rating Agencies at the following
addresses: (i) if to Standard & Poor's, 26 Broadway, 15th Floor, New York, New
York 10004-1064, Attention: Asset-Backed Monitoring Department; (ii) if to DCR,
55 East Monroe Street, 35th Floor, Chicago, Illinois 60603, Attention: MBS
Monitoring; or (iii) if to Fitch, One State Street Plaza, New York, New York
10004, Attention:  [Glenn Costello].

        Section 12.14 Inconsistencies Among Transaction Documents.

        In the event certain provisions of a Transaction Document conflict with
the provisions of this Sale and Servicing Agreement, the parties hereto agree
that the provisions of this Sale and Servicing Agreement shall be controlling.


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<PAGE>   93



        IN WITNESS WHEREOF, the following have caused their names to be signed
by their respective officers thereunto duly authorized, as of the day and year
first above written, to this SALE AND SERVICING AGREEMENT.

                            MEGO MORTGAGE HOME
                              LOAN OWNER TRUST 1997-3,

                            By: Wilmington Trust Company, not in its individual
                                  capacity but solely as Owner Trustee

                            By:
                               --------------------------------------------
                            Title: Vice President

                            FINANCIAL ASSET SECURITIES CORP.,
                              as Depositor

                            By:
                               --------------------------------------------
                               Name: Peter McMullin
                               Title: Vice President

                             MEGO MORTGAGE CORPORATION,
                               as Seller and Servicer

                             By:
                               --------------------------------------------
                                Name: James L. Belter
                                Title: Executive Vice President

                             FIRST BANK NATIONAL ASSOCIATION,
                                as Indenture Trustee and Co-Owner Trustee

                             By:
                               --------------------------------------------
                                Name: Lynn Steiner
                                Title: Assistant Vice President

                                       89


<PAGE>   94



                               NORWEST BANK MINNESOTA, N.A. as Master
                                  Servicer

                               By:
                                  --------------------------------------------
                                  Name: Michael Mayer
                                  Title: Vice President

     






                                       90


<PAGE>   95



THE STATE OF ________        )
                             )
COUNTY OF ________           )

        BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Emmett R. Harmon, known to me to be a person and officer
whose name is subscribed to the foregoing instrument and acknowledged to me that
the same was the act of the said WILMINGTON TRUST COMPANY, NOT IN ITS INDIVIDUAL
CAPACITY BUT IN ITS CAPACITY AS OWNER TRUSTEE of MEGO MORTGAGE HOME LOAN OWNER
TRUST 1997-3, as Issuer, and that he executed the same as the act of such
corporation for the purpose and consideration therein expressed, and in the
capacity therein stated.

        GIVEN UNDER MY HAND AND SEAL OF WILMINGTON TRUST COMPANY, this the 27th
day of June, 1997.

                        ------------------------------------------------------
                        Notary Public, State of ________

THE STATE OF ________        )
                             )
COUNTY OF ________           )

        BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Peter McMullin, known to me to be a person and officer whose
name is subscribed to the foregoing instrument and acknowledged to me that the
same was the act of the said FINANCIAL ASSET SECURITIES CORP., as the Depositor,
and that he executed the same as the act of such corporation for the purpose and
consideration therein expressed, and in the capacity therein stated.

        GIVEN UNDER MY HAND AND SEAL OF FINANCIAL ASSET SECURITIES CORP., this
the 27th day of June, 1997.

                        --------------------------------------------------------
                        Notary Public, State of ________



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<PAGE>   96



THE STATE OF ________        )
                             )
COUNTY OF ________           )

        BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared James L. Belter, known to me to be the person and officer
whose name is subscribed to the foregoing instrument and acknowledged to me that
the same was the act of the said MEGO MORTGAGE CORPORATION, as the Seller and
Servicer, and that he executed the same as the act of such corporation for the
purposes and consideration therein expressed, and in the capacity therein
stated.

        GIVEN UNDER MY HAND AND SEAL OF MEGO MORTGAGE CORPORATION, this the 27th
day of June, 1997.

                        ----------------------------------------------------- 
                        Notary Public, State of ________

THE STATE OF ________        )
                             )
COUNTY OF ________           )

        BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Lynn Steiner, known to me to be the person and officer whose
name is subscribed to the foregoing instrument and acknowledged to me that the
same was the act of the said FIRST BANK NATIONAL ASSOCIATION, a national banking
association, as the Indenture Trustee, and Co-Owner Trustee, and that she
executed the same as the act of such entity for the purposes and consideration
therein expressed, and in the capacity therein stated.

        GIVEN UNDER MY HAND AND SEAL OF FIRST TRUST OF NEW YORK, NATIONAL
ASSOCIATION, this the 27th day of June, 1997.


                        -----------------------------------------------------
                        Notary Public, State of ________

                                       92


<PAGE>   97


THE STATE OF ________        )
                             )
COUNTY OF ________           )

        BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Michael Mayer, known to me to be the person and officer
whose name is subscribed to the foregoing instrument and acknowledged to me that
the same was the act of the said NORWEST BANK MINNESOTA, N.A., as the Master
Servicer, and that he executed the same as the act of such corporation for the
purpose and consideration therein expressed, and in the capacity therein stated.

        GIVEN UNDER MY HAND AND SEAL OF NORWEST BANK MINNESOTA, N.A., this the
27th day of June, 1997.


                        -----------------------------------------------------
                        Notary Public, State of ________



                                       93